Shift to Digital by U.S. Entertainment and Media Industry Boosts M&A Activity, According to PwC US

NEW YORK, Jan. 27, 2011 /PRNewswire/ -- U.S. entertainment and media (E&M) merger and acquisition (M&A) activity outpaced the overall U.S. deal market in 2010, according to PwC US. With the industry's fast-paced shift to digital - and attractive levels of corporate cash reserves and private equity dry powder, PwC believes the catalysts are in place for more E&M deal activity during 2011.

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"As the entertainment and media industry accelerates its transition to mobile access and dynamic content, cash reserves and improved debt financing conditions will allow companies and private equity firms to execute on M&A strategies focused on content offerings and to reach key audiences amid an increasingly digital environment," said Thomas M. Rooney, U.S. entertainment and media M&A leader, PwC. "With the growing influence of new media touch points, E&M companies may also take advantage of strategic M&A plans to expand into new geographies and acquire new technologies. Companies must determine how they are going to reach their audiences in an increasingly digital market. Look for E&M deal volume to continue to outperform the broader market in 2011 as media companies complete more middle-market acquisitions."

In 2010, completed E&M deal volume increased slightly by 3 percent to 804 transactions, while total completed and disclosed deal value fell from $37.2 billion in 2009 to $33.5 billion in 2010. A primary driver of the increase in deal volume was Internet software & services (B2C) deals. PwC notes an increase in the percentage of announced transactions that did not disclose value, which could have an impact on the actual 2010 value trends. However, despite the decrease in announced deal value, the pipeline for E&M deals in 2011 points to continued improvement and a strong outlook, with more than 200 deals and $24 billion of deal value already announced and pending (including the recently approved NBC Universal joint venture between Comcast and GE).

Corporate deal activity remained at the forefront in 2010 with strategic buyers contributing 83 percent of total deal volume. However, with the decline in reported and completed corporate mega-deals (deals greater than $1 billion), total corporate E&M deal value decreased from 81 percent of disclosed deal value in 2009 to 59 percent in 2010.

E&M transaction multiples for deals with disclosed values appear to have increased year over year for the first time since 2007, as median enterprise value to EBITDA multiples increased from 8.3x in 2009 to 9.8x in 2010 – still well below the six-year high of 13.6x in 2007. "As media content becomes increasingly interactive, look for business models to shift from 'business paid for' [advertising] to 'consumer paid for' [subscriptions and per-transaction payments]," said Bart Spiegel, a U.S. entertainment & media M&A director, PwC. "The comparably higher stickiness of consumer-paid models should lead to higher valuation multiples in certain sectors."

Private equity solidified its presence within certain E&M subsectors with acquisitions of platform and strategic bolt-ons throughout 2010 (particularly within casinos and gaming, recreation and leisure, publishing and broadcasting). The number of private equity-backed deals increased from 126 in 2009 to 140 in 2010, while their announced value nearly doubled from $6.9 billion in 2009 to $13.7 billion in 2010. PwC sees the potential for an increased appetite for mega-deals by private equity firms.

"With almost $1 trillion of untapped committed capital worldwide, private equity is still primed to make significant acquisitions in the future," Spiegel continued. "Look for a selection of E&M companies to re-evaluate existing business portfolios and accelerate their divestiture plans, as valuations continue to rebound and interest from private equity intensifies."

Pace of E&M Bankruptcies Decline, Emergences Rise in 2010

Improving economic conditions and favorable credit markets helped stem the pace of bankruptcies and defaults across all U.S. industries in 2010 from near record levels of 2009. Chapter 11 bankruptcy filings for U.S.-based E&M companies declined from 30 in 2009 to 21 in 2010. (1) Filings were driven primarily by sectors highly dependent upon advertising spending, e.g. publishing, nine filings, and/or discretionary consumer spending, e.g. casinos and gaming, four filings. Of the 21 E&M companies that filed for bankruptcy in 2010, 11 emerged during the year, eight of them within two months of filing. "Fast-tracked emergences illustrate a continuing trend toward pre-packaged bankruptcies, which offer quick processing and are perceived to be less costly and less damaging to a company's asset value," Rooney said.

A further 18 E&M companies emerged from bankruptcy during 2010 relating to prior-year filings (2009: 15 filings, 2008: three filings). Of all 29 E&M companies to emerge from bankruptcy in 2010, an overwhelming number of 27 emerged by recapitalizing their existing debt with lenders, while only two emerged via a sale. According to PwC, the high number of companies emerging from bankruptcy combined with the volume of recapitalizations in 2010 is a strong indicator that lenders are prepared to hold their positions in companies under modified credit terms in the belief that improving market conditions will allow companies to regain financial footing under these recapitalized debt levels.

E&M factors that continue to present opportunities for M&A include:

• International investment – According to PwC, cross-border deals were another significant driver of M&A in 2010, led by several U.S. E&M companies using several forms, including pure acquisitions, joint ventures and other partnership opportunities. International expansion will continue to be a key driver for M&A activity in 2011 as both new and traditional media look to expand their footprint, increase brand recognition and add to their consumer base. E&M companies will also look toward the international markets to shore up additional content.
• Video games – PwC expects further consolidation in the video games segment, as major publishers seek to supplement their portfolios with developers that show a continued ability to bring to market new hit games and games that transition well across platforms, e.g. from phone to tablet to Internet-enabled TV. Game developers with a high amount of downloadable content, in-game advertising and micro-transactions for virtual goods offer higher margins and could attract suitors interested in raising their profitability. According to PwC, the video games industry does not fully hinge on the health of the capital markets because some of the established players have significant cash on their balance sheet to help fund strategic acquisitions.
• Social media – The latest round of fundraising for social media websites may signal interest for some companies to expand overseas to grow market share, while others will look to shed non-performing assets in 2011. PwC expects media companies to continue to make investments in the social gaming space to grab share of this fast-growing market.
• Content and distribution – Expect traditional media companies to keep a close eye on what comes out of the NBC Universal joint venture between Comcast and GE during 2011, now that the FCC has approved it.  A vertically integrated market participant could impact future M&A trends.
• Concerns about the "debt maturity wall" (2013–2015) –E&M companies are expected to face significant refinancing burdens in the years ahead, according to S&P. Of particular concern is the upcoming "maturing wall" in 2013–2015, when more than $145 billion in investment-grade and speculative-grade E&M industry debt comes due. Depending on the pace of economic recovery, many underperforming E&M companies still carrying unsustainable debt levels could face increasingly distressed scenarios heading into this 2013–2015 period.

Findings are based on research provided by industry-recognized sources, including  Thomson Reuters, Capital IQ, Bankruptcydata.com, Standard & Poors, Preqin, Bloomberg and PwC's Global Entertainment and Media Outlook: 2010–2014. Dealmakers in the E&M sector may find the historical and forecast analysis insightful as they evaluate regional growth rates, consumer spending and behavior across industry segments and territories.  

PwC's Transaction Services practice provides due diligence on both the buy and sell sides of a deal, along with advice on M&A strategy, valuation, accounting, financial reporting and capital raising. For companies in distressed situations, we advise on crisis avoidance, financial and operational restructuring and bankruptcy. With approximately 1,000 deal professionals in 16 cities in the United States and a global network of over 6,000 deal professionals in 90 countries, PwC deploys experienced teams with deep industry and local-market knowledge, and technical experience tailored to each client's situation. Our field-proven, globally consistent, controlled deal process helps minimize their risks, progress with the right deals, and capture value both at the deal table and after the deal closes. For more information about M&A and related PwC services, please visit: www.pwc.com/ustransactionservices.  

About the PwC Network

PwC network firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

© 2011 PwC.  All rights reserved. "PwC" and "PwC US" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate and independent legal entity.

(1) Defined as debtors with pre-petition liabilities of more than $100 million.

SOURCE PwC

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