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

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The 259 deals in the first half were down 18 percent, says PricewaterhouseCoopers, with traditional film and TV not seeing "a lot of activity." Content library and video game assets are seen as possible targets though.

Amid the "massive upheaval to the economy" from the novel coronavirus pandemic, it has "undeniably had an impact" on mergers and acquisitions in the media and telecommunications industries, but it "has been more muted, with digital and telecom assets proving to be attractive assets in the COVID-19 era," PricewaterhouseCoopers said in a Thursday report.

Traditional film and TV assets have "not seen a lot of activity, and that started last year, before the pandemic," Bart Spiegel, U.S. technology, media & telecommunications deals partner at PwC, tells THR. "A lot of the big players have been trying to get their houses in order and have been focused on the launch of streaming services, ... so we have seen them pull back."

Among the big deals announced in the core Hollywood space last year were the recombination of Viacom and CBS and the merged ViacomCBS' deal for a 49 percent stake in Miramax, followed by this April's merger agreement between STX Entertainment and India's Eros International.

Looking ahead, however, PwC mentioned content libraries and video game assets as possible takeover targets amid the pandemic. And Spiegel says now that Hollywood giants have launched their streaming services, they could review assets and decide "what parts of our portfolio are not consistent with our strategy going forward” and sell these noncore assets like in other downturns. (Pre-pandemic, ViacomCBS, for example, had already said it would sell book publisher Simon & Schuster.)

PwC counted 259 announced media and telecom deals in the first half of 2020, down 19 percent from the 321 recorded in the second half of 2019 and 18 percent from the 314 in the first half of 2019. Deal value for the first six months of 2020 reached $30.7 billion, down 37 percent compared with $48.6 billion in the second half of 2019 and down 29 percent from $43.3 billion in that year's first half.

"While COVID-19 undeniably had an impact on the media & telecom sector, deal volumes had begun to contract in 2019, with the first half of 2020 broadly keeping pace with the fourth quarter of 2019, albeit with a weaker second quarter," PwC said. "While sub-sectors reliant on advertising revenues felt the impact more sharply, telecommunications and digitally-focused sub-sectors were more resilient in the current environment." 

And it explained: "While COVID-19 has clearly had a negative impact on certain industries, the Media & Telecom sector has undergone a significant shift towards digitization over the past few years, uniquely positioning some sub-sectors to be more resilient through the crisis." 

It also highlighted that deal volumes "have always been volatile in the sector" as they are largely driven by mega-deals worth more than $5 billion. "Announced deal values of $12 billion and $19 billion in the first and second quarter, respectively, fell within the range of the last eight quarters." PwC counts three mega-deals for the first half of 2020, close to the four seen for all of 2019.

The biggest deal of the first half was John Malone's Liberty Broadband's $7.7 billion proposed takeover of GCI Liberty, which includes Alaska-based telecom firm GCI, as well as stakes in cable giant Charter Communications and other assets. The other top deals are also all in the telecom and internet space. 

Podcasting remains one of the hot deal areas, PwC noted in its report, which said: "Podcast-related deals continue in the music/audio content sub-sector – a sign of confidence in their staying power as brands return to advertising." Among other deals in the segment, audio entertainment giant SiriusXM has this year agreed to acquire podcast platforms Simplecast and Stitcher.

And private equity buyers were on the rise early this year. "As a percent of total volume, deals with private equity buyers
accounted for 33 percent of deal activity in the second quarter of 2020, the strongest quarter for private equity in recent history," PwC noted. After all, private equity firms started out the year "sitting on dry powder and ready to invest."

Case in point: the investor group led by former Viacom CFO Wade Davis that agreed in February to acquire a 64 percent majority stake in Spanish-language media giant Univision Communications for an undisclosed sum. 

Meanwhile, big entertainment companies have beefed up their streaming businesses this year, with Fox Corp. buying Tubi and Comcast/NBCUniversal acquiring Vudu and Xumo.

"COVID-19 has ushered in an era of acceleration and experimentation, challenging traditional distribution models and
providing an opportunity to evaluate alternate strategies to compete in a dynamic marketplace," said Spiegel.

Looking at the M&A environment ahead, Spiegel notes that "there are companies out there that are positioning certain assets for sale in the foreseeable future, and there is enough cash out there" and "enough buyers."

Some companies could decide to sell or merge due to the virus crisis' impact and a lack of scale and global reach, the PwC expert says. "Coming out of this pandemic, it is going to be survival of the fittest," explains Spiegel. "You are going to see companies whose hands are forced." And "a lot of uncertainty" also means that there are "opportunities for some smart moves that come out of this uncertainty," he adds

PwC noted "the looming content shortage" as one potential deal driver, saying in its report: "In a typical year, most TV shows would be in production or pre-production by early summer. With most start dates delayed, it’s inevitable that production delays will lead to delayed starts, longer production times to allow for distancing measures or abbreviated seasons. This will have a knock-on impact to broadcasters who rely on content to generate advertising revenue, studios or production companies awaiting the availability of in-demand talent and streaming platforms which feature shows after their first run. In the short-term, this will increase demand for non-scripted production with shorter lead times and the potential acquisition of content libraries to fill gaps."

It also highlighted the likely "acceleration of disruption," with cord-cutting gaining further traction amid the pandemic. "While the return of live sports will draw some viewers back, COVID-19 has clearly accelerated the disruption, with many households opting for multiple streamers at a lower total cost than their cable package. Likewise, video game play has increased in popularity as games like Animal Crossing allow players to connect in a socially distant manner. While the level of game-play reached during lockdown will likely decline, we expect to see continued demand from new gamers, and as a result gaming assets."

PwC also raised the question if the metaverse would become the new frontier. "With COVID-19 putting a pin in live events, media companies have been increasingly looking to digital 'theme parks' like Fortnite, Minecraft and Roblox to experiment with customer experience and interactions," its report noted. "During the shutdown, over 12 million players concurrently logged in to Fortnite to watch a Travis Scott concert, while Quibi premiered content in Fortnite as well. As interest in virtual
experiences and technologies grows stronger in the current environment, media and tech companies will start to look at startups in the metaverse space as attractive M&A targets."