Brexit: What It Means for Entertainment Industry M&A
"In dollars, ITV will never look cheaper," says one analyst, with another saying the Brexit vote "increases the chances of a bid by one of the major U.S. media companies."
Will U.S. entertainment powerhouses look to take advantage of lower U.K. sector stock prices and a weaker pound to swoop in and make some acquisitions following a British referendum that yielded a majority for a Brexit? Or will they stay away amid a lack of clarity on what will happen in the U.K., with some market watchers fearing a recession as early as next year following the results?
Most industry watchers said after the results of the historic vote, which saw a 52 percent majority of Brits come out in favor of an exit from the European Union, sunk in that things will need more time to play out and show how stocks and currency exchange rates develop longer term.
Hollywood giants have in recent years repeatedly gone shopping in Britain, with Viacom buying U.K. broadcaster Channel 5 for $725 million in late 2014 after Discovery Communications and John Malone's Liberty Global acquired production firm All3Media for $930 million. Liberty Global had in 2014 also bought an $825 million stake, of 6.4 percent, in U.K. broadcaster ITV, raising it to 9.9 percent the following year.
With U.K. media and entertainment stocks — including TV giant ITV, pan-European pay TV powerhouse Sky, studio space operator Pinewood Group and producer-distributor Entertainment One — down sharply Friday amid a global stocks bloodbath following Britain's vote in favor of an EU exit and the pound weakened, some observers started discussing the possible fallout on deals activity. Add to that a pound slide of around 8 percent compared to the dollar, which at one point on Friday made the currency cheaper than at any point over the past 30 years, and some said bargain hunters may come knocking over time.
Deal watchers focused most attention on ITV on Friday, even though the company has shown no interest in selling.
"In dollars, ITV will never look cheaper — so it could now get bid for," Peel Hunt analyst Alex DeGroote tells The Hollywood Reporter. The stock closed down 20.4 percent on Friday and had a market value of 7.153 billion pounds, according to Bloomberg. With each pound worth $1.3693 on Friday afternoon London time, that would have amounted to $9.795 billion. Earlier in the day, when the pound had hit $1.3229, its lowest point compared to the dollar since 1985, that would have even amounted to only $9.463 billion. In comparison, at a high point of around $1.49 on Thursday, ITV's Friday market value would have converted to $10.658 billion.
DeGroote didn't say which companies could possibly consider a bid for ITV, but bankers and analysts have in the past cited Liberty Global and Discovery, in which Malone also owns a big stake, as possible suitors. The companies didn't comment on the issue on Friday.
Liberum Capital analyst Ian Whittaker also argued that the Brexit vote and its pound and ITV stock effect "increases the chances of a bid by one of the major U.S. media companies" for ITV.
ITV CEO Adam Crozier has repeatedly said that ITV isn't for sale and sees its own self as a consolidator. It has been acquiring TV production firms in the U.K., U.S. and elsewhere. Liberty Global has so far said it has no further plans beyond owning its 9.9 percent stake in ITV, and Discovery CEO David Zaslav recently said that bidding for ITV "would be a big bite for us."
Meanwhile, Fox owns a 39 percent stake in Sky, and while the stock of Sky dropped 6.6 percent on Friday, analysts said that wasn't as steep a fall as those of other stocks and argued that a single-day decline wouldn't make a big difference in terms of Fox's view of Sky. They also highlighted that Fox management has repeatedly said it has no immediate plans to buy full control or sell its stake for now, focusing instead on ensuring continued growth and smooth operations. Fox CFO John Nallen said last month: "At the moment, there is no urgency for us to do anything other than harvest value out of Sky. ... There is no catalyst for us to say we need to change that.”
Said one banker on Friday: "I'd expect nothing has changed about [Fox's] approach today." A Fox spokesman didn't comment.
While stocks dropped Friday and the pound move made U.K. companies even cheaper in dollar terms, that banker also cautioned that potential buyers may stay away from deals in Britain until the situation after the Brexit decision becomes clearer. "No one has any idea what is going to happen after the Brexit vote, and this lack of clarity makes it harder to forecast things, so who knows" if anyone will want to jump in, that banker said.
Others said that pound-based revenue for U.K. businesses would over the near-term translate into lower dollar revenue, which could also keep away suitors. Many U.S. entertainment players with big international operations, such as Discovery or Fox, have seen their financials affected by currency trends over the past couple of years.
The Brexit vote "probably slows it down at least for the very near-term," Northlake Capital Management's Steven Birenberg said about M&A activity. "Uncertainty would make companies hesitant to take M&A risk." But he also added that, of course, U.S. companies will find U.K. companies "a lot cheaper" given the strength of the dollar versus the pound.
Enders Analysis founder and analyst Claire Enders also focused more on the risks, telling THR that acquisitions of U.K. creative companies could be "negatively affected by the years of uncertainty ahead." She explains: "We have benefited very disproportionately from USA investment for 15 years due to [the] European market in particular."
Adds Enders' colleague Toby Syfret: "In the case of ITV, whose share price fell by almost 20 percent after the Brexit news, it does reflect an instant response to the market news. We need to see at what level it settles down to first, and then there is the question of the impact of Brexit on TV advertising revenues" and consequently ITV's financial outlook.