Media and Telecom Deal Activity Stable Despite Pandemic: Study

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Times Square on Dec. 9, 2020.

"COVID-19 forced companies to be more introspective and reconsider their core strategies," says PricewaterhouseCoopers. Small and midsize companies will likely see consolidation so they can "scale up, cut costs and compete effectively."

Deal activity in the media and telecommunications industries for the past 12 months through mid-November was roughly on par with the activity for all of 2019 despite the novel coronavirus pandemic, PricewaterhouseCoopers said in a Thursday report.

The pandemic came on top of digital disruption, leading industry leaders to re-think and re-focus their core strategies and to double down on digital efforts, while selling non-core assets, it argued.

And PwC predicts a so-called K-shaped recovery, which occurs when different parts of the economy after a recession or crisis recover at different rates, times, and/or magnitudes rather than following an even, uniform recovery path.

In that context, PwC noted the "disparity between sub-sectors that clearly benefited from the new normal (like cloud-based services) versus those that were not as suited for the pandemic (like movie theaters or other in-person events)."

And the firm forecasts that consumer changing habits will be driving permanent change, including a "shortening of theatrical release windows, closer ties between studios and theaters through M&A, or streaming companies potentially playing a bigger role in sports media rights."

Over the past 12 months, the media and telecommunications sector experienced the announcement of 612 deals, down 4 percent from 2019, with a combined value of $99 billion, up 8 percent. "Broadly speaking, the sector was one of the more resilient ones during the pandemic, with deal activity remaining largely flat when compared to 2019," PwC concluded.

"It's actually really good news that the M&A marketplace could hold itself stable in spite of the pandemic and all the things going on," Bart Spiegel, U.S. entertainment & media deals leader at PwC, tells THR.

Deal drivers of the past year include "emerging trends that will continue to shape M&A in the sector through the next year and beyond," the report suggested. "These trends include changing consumer behaviors, accelerating disruption toward a digital future and divestitures of non-core assets."

Spiegel highlights though that "in our sector, there are some real winners and some real losers coming out of this." He explained: "You definitely have sub-sectors, like live events, movie theaters and others, that have been really challenged during this pandemic with the absene of in-person gatherings, but there has been an uptick in other M&A activity," including streaming and video gaming. "I think in 2021, you are going to continue to see strong M&A. There is still access to capital, and people still need to make strategic moves."

Among major entertainment industry deals, local TV station giant E.W. Scripps said in September it was buying broadcaster Ion Media from private equity firm Black Diamond Capital Management for $2.65 billion. (The similarly big ViacomCBS deal to sell book unit Simon & Schuster for nearly $2.2 billion came only in late November after the end of the period PwC focused on.)

This summer, STX Entertainment and Indian movie major Eros International closed their stock-for-stock merger, whose value some observers estimated at $1.1. billion, forming film and TV company Eros STX Global Corp., which looks to play in Hollywood, Bollywood and China.

And private equity consortium led by former Viacom top executive Wade Davis earlier this year agreed to acquire a majority stake in Spanish-language media giant Univision Communications in a deal set to close before the end of the year. A price tag wasn't disclosed, but Bloomberg News reported that the buyers are contributing about $800 million in the deal, giving the firm an equity valuation of less than $1.5 billion.

In streaming deals, Fox Corp. this year acquired streamer Tubi TV for $440 million, while Comcast/NBCUniversal bought Vudu and Xumo. In key content deals, ViacomCBS in late 2019 agreed to buy a 49 percent stake in Miramax for $375 million in a deal with BeIN Media Group that closed in the spring, while Parasite studio CJ Entertainment and Merchandising and RedBird Capital Partners this year unveiled $275 million in strategic investments in David Ellison's Skydance Media.

In other deals, Red Ventures acquired CNET from ViacomCBS for $500 million, Playboy Enterprises agreed to be bought for more than $400 million, factual content streaming service CuriosityStream was taken over for $300 million, and music streamer Spotify struck a deal to purchase The Ringer for up to around $200 million.

PwC said that the coronavirus pandemic caused business pain in many industries, but also accelerated companies' moves to change their focus and positioning. "COVID-19 forced companies to be more introspective and reconsider their core strategies," its report found. "For larger conglomerates, that meant forging ahead with their digital strategies — whether that includes streaming platforms, data-driven advertising or 5G networks — and disposing of non-core assets to generate cash. For small and midsize companies, that will likely lead to consolidation across the industry in order to scale up, cut costs and compete effectively."

Without speculating on specific assets that may be up for sale, PWC highlighted "how M&A activity reshaped the sector in the wake of the 2008 financial crisis, and we predict similar realignment here in the coming years."

Signs of this year may point the way. As consumers adapted to the COVID disruption and work-from-home guidance, digital media consumption experienced "significant growth in the absence of live events," according to the PwC report. And sector giants reacted to that with deals to boost their presence in new focus areas.

"ViacomCBS’ recently announced sale of publisher Simon & Schuster to Bertelsmann ... follows ViacomCBS’ strategic review of its assets and provides capital to grow its streaming offering," PwC said. And Verizon’s recently announced majority sale of the Huffington Post to BuzzFeed means a continued divestment of media businesses by the telecom firm, "freeing up additional cash to pursue its 5G strategy."

Following a trend set in motion in the past two years, PwC also highlighted that private equity investments in the media and telecom sector reached "a new peak this year, with PE investments accounting for 34 percent of deal volumes — up from 28 percent in the prior year."

PwC's report also addressed possible areas of potential media deals going forward, including content for streaming services. "For most entertainment giants that are refocusing their strategies after an era of massive consolidation, the core focus has shifted toward over-the-top streaming services as the sector moves from an advertising-reliant revenue model toward a consumer model," it said. "To grow these platforms, their parent companies will need to continue to acquire or develop a diverse slate of content, particularly as they expand internationally and require more localized content to compete with existing players."

In the near term, deals could prove difficult as TV and film production continues to be affected by restrictions "that lead to longer, more costly production timeframes," PwC said. But Spiegel highlights: "Compelling content is king. There are a lot of buyers out there that need compelling content."

He also predicts more streaming deals for  direct-to-consumer "technology and platforms that contribute to a compelling user experience." And he notes that streaming-related M&A will also involve companies that are not among the biggest players, explaining: "There are still players looking for a direct-to-consumer solution."

Other trends that have been accelerated by COVID-19 also mean that "cloud and app-based services, digital publishers, podcasting and video game publishers have all become more attractive acquisition targets as advertising budgets became focused on digital mediums, and consumers turned to at-home entertainment," the PwC report highlighted.

"Meanwhile, sub-sectors reliant on in-person audiences or production and traditional advertising will take longer to recover, and they could become takeover targets as the need for funding grows," the report noted. But Spiegel also tells THR: "I think the general public wants to get back to in-person events," including cinemas, festivals, and concerts."You will find there is pent-up demand for in-person events once everybody is comfortable."

With Wall Street in the past sometimes wondering if film studios could buy cinema groups, but  studios narrowing theatrical windows, Spiegel said here, as in other areas, companies will analyze whether an acquisition makes financial and strategic sense. "Going into the brick-and-mortar business when you are trying to really position yourself as a digital entertainment company would be a significant step," he argues. "So while we currently see depressed valuations for theaters and there are studios that have cash to spend, they will ultimately take a step best and look where the best return on investment lies."

However, emerging technology firms could be in future deal focus again, PwC argued in its report. "Following the convergence of video games, virtual and augmented reality, and cloud technologies into the metaverse over the past few years, companies have begun to experiment with delivering different experiences through platforms like Fortnite," the PwC report noted. "This technology has been used to deliver shared video game experiences, host virtual concerts and premieres, and even change the way CGI-heavy films and TV shows have been shot. Companies pioneering this technology could be interesting takeover targets for both media conglomerates seeking to vertically integrate these technologies and larger tech companies looking to grow their capabilities."

During this week's UBS Global TMT Virtual Conference, Hollywood top executives also emphasized their focus on deals that optimize their business portfolios. ViacomCBS CEO Bob Bakish mentioned that the recent Simon & Schuster deal came after "a strategic review of ViacomCBS assets that we undertook in early 2020, one where we identified noncore assets based on the lack of a fit with our studios, networks and streaming focus," he said. And AT&T CEO John Stankey said the company, which has been considering selling a stake in pay TV unit DirecTV, could shed "tangential" assets that may cause "distractions" from the core focus of the company.

 

Pandemic's Media and Telecom M&A Impact "Has Been More Muted": Study