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Industry Executives More Bullish on Deals, Economy, Survey Finds

John Malone Sun Valley 2011 - H 2013
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Liberty Media chairman John Malone has spoken out in favor of cable industry consolidation.

Accounting firm EY sees "growing confidence in the global economy, a focus on investments in core products and services, and an improving transaction outlook," which could lead to "larger and more significant deals."

Media and entertainment top executives have turned more bullish on the economic outlook and expect more merger and acquisition activity, according to an EY survey.

Heading into 2014, sector companies from around the world are optimistic about the global economy and expect growth, an improving deal environment and maintaining or growing their current workforce, the company's ninth Capital Confidence Barometer found.

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EY, the new brand name used by the big accounting firm previously known as Ernst & Young, found that 68 percent of senior media and entertainment executives surveyed believe the global economy is improving, compared with only 26 percent a year ago. Another 23 percent believe the economy is stable, with only 4 percent saying it is modestly and 5 percent saying it is strongly declining.

Deals are likely to come more into focus, with 74 percent of executives predicting M&A deal volumes to rise over the next year, 21 percent forecasting stable volume, and only 5 percent seeing a decline. Twenty-five percent of media and entertainment executives said they expect their own company to pursue acquisitions over the next year.

“As we approach the end of 2013, it’s clear the media and entertainment industry is optimistic about the year ahead,” said Tom Connolly, EY’s global media & entertainment transaction advisory services leader. “Growing confidence in the global economy, a focus on investments in core products and services, and an improving transaction outlook all point to the potential for larger and more significant deals within the M&E industry.”

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While EY wouldn't discuss specific possible transactions, Connolly acknowledged that cable industry deal chatter has been intensive in recent months. "Deal interest is very advanced in some sectors, and earlier in others," he said. In the pay TV and related space, there has been "interest in greater geographic reach," he said.

After hoarding cash amid uncertain outlooks in recent years, "there is more optimism to be proactive, and executives are looking to establish themselves in a more competitive way," added Connolly.

He said he found that one of the more surprising results of the EY survey was a reduced value gap between prices that potential sellers and buyers see for industry companies. "There has been a significant coming together of expectations," Connolly said, citing a price gap of less than 10 percent in the media and entertainment industry. "That's encouraging for M&A and very different from other sectors. The value gap is almost 30 percent overall" across all industries.

Media and entertainment sector managers are also more optimistic about other areas compared with last year’s survey. For example, 53 percent said their focus during the next 12 months would be on growth initiatives, compared with only 39 percent feeling that way a year earlier.

Media and entertainment jobs should be relatively secure, according to the views of sector executives. It found that 57 percent predicted employment growth, up from 20 percent, with 55 percent saying they plan to maintain the size of their current workforce, and 32 percent planning increases. Only 13 percent of executives surveyed indicated they plan to reduce staff.

Also, 52 percent expressed confidence in corporate earnings, up from 15 percent. More executives also see improved credit availability.

But cost efficiencies will remain in focus after a few years of cuts. EY found that 32 percent of executives indicated cost reduction and operational efficiency would be their focus in 2014. And 66 percent said there is a greater focus on efficiency and cost control at their companies than there was a year ago.

"Now, the overall mindset is more offensive, but the feeling still is that we can't let our costs get out of control," Connolly said, explaining how the increased economic confidence and cost focus go together. "Cost control is still a high-priority item. … That established thinking is still there, but there is a sense of optimism, of wanting to embrace growth opportunities."

After years of caution and defensive strategies, executives now sound more optimistic across key areas, Connolly concluded. "What we're seeing now in the discussion is one that's more forward-looking with a sense of optimism," he explained. "The level of discomfort with uncertainty is not as great."

The growing comfort that new technologies and digital platforms provide business and revenue opportunities also plays into the more upbeat tone of this year's survey, according to the expert. "We now see that these platforms have much more robust returns for content owners," said Connolly. "They are much more confident about their businesses and embracing new platforms."
 
Asked about what they expect their companies to use excess cash for, the second-most-popular answer in the media and entertainment industry was dividends, which rank only fourth in the overall EY survey across all industries.

"This says that there is a high recognition that given high cash flows there is a willingness to reward shareholders," Connolly said. "This may also be evidence for why sector stocks have outstripped many industries."
 
EY also found more interest in risk-averse uses of cash, such as putting it into established, known products and services to grow them as opposed to investing in emerging markets.

Email: Georg.Szalai@THR.com
Twitter: @georgszalai