Deal Insights for 2012

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Entertainment and media deal insights

Despite persistent financing pressures, 2011 saw steady deal flow for the US entertainment and media (E&M) sector as companies and private equity firms executed on their M&A strategies in an evolving digital marketplace. New and non-traditional market entrants continue to establish themselves as players in the US E&M market, which will be an important source of M&A activity in 2012. Strong valuations for content owners and recent changes in online gaming regulations could also impact future deal activity. And funding these transactions are approximately $2.5 trillion of corporate cash reserves and private equity investment capital.

PwC analyzes mergers and acquisitions (M&A) activity and industry trends impacting the entertainment and media (E&M) sectors annually and shares its view on the factors that drove deal activity in 2011 with PwC's expected deal trends for 2012. E&M companies may find the analysis insightful and useful as they evaluate the E&M deal environment over the next 12 months.

Overall themes driving M&A

• New market participants are impacting the E&M deal landscape - The lines between media and technology are starting to blur as new and non-traditional entrants to the E&M market are helping to accelerate the changing media landscape and challenging existing business models of traditional entertainment and media (E&M) players. E&M companies also need to be more aggressive in pursuit of deals as new market entrants increase competition for prime companies. Furthermore, expected IPOs from social media companies in 2012 may allow them to exert further influence in the E&M market.
• Content creators draw greater attention - Digital media consumption and over-the-top services are key drivers of the increasing importance of content ownership. Corporate buyers are expanding their libraries domestically and overseas. In addition, the continuing transition to digital media consumption is changing the landscape and delivery of consumer advertising, which could lead to M&A activity in the advertising sector.
• Changes in online gaming regulation - Recent legislative changes surrounding online gaming could present untapped business opportunities for both corporate and financial buyers due to the estimated substantial size of the U.S. online gaming market. Even more significant are the potential partnerships online gaming offers with social media.

M&A historical trends

• In 2011, total completed and disclosed E&M deal value increased to $52 billion from $27 billion in 2010. However, 2011 included $27.3 billion in value related to the broadcasting mega-deal which closed in January of this year. When excluding this mega deal, completed and disclosed deal value remains flat year over year, however average deal value increased 25% from $128 million in 2010 to $160 in 2011.

• Total E&M deal volume decreased 14 percent from 801 deals in 2010 to 687 deals in 2011. A primary driver of the decline in deal volume was driven by financial buyers with limited access to favourable credit markets in the second half of 2011 due to the concerns for the European debt markets. Private equity deal activity declined 35% from 139 deals in 2010 to 91 deals in 2011 with value decreasing 47% over the same period.
• Corporate deal activity declined 10% from 662 deals in 2010 to 596 deals in 2011 with strategic buyers contributing 87% percent of total deal volume. However, excluding the broadcasting mega-deal, strategic backed deal value is up 27% from $16.0 billion in 2010 to $20.3 billion in 2011.

• In 2011, E&M completed deals by U.S. companies buying overseas with disclosed deal value increased 28 percent to 46 deals ($5.4 billion) from 36 deals in 2010 ($4.5 billion) spearheaded by large publishing and broadcasting acquisitions. In addition, there are 31 announced and pending U.S. outbound deals as of December 2011 with a total expected deal value of $5.3 billion and $4.1 billion attributed to a music acquisition.

Sector focus

• Content providers - As consumers navigate the shift to digital media consumption, consumption patterns have changed dramatically, giving rise to Over-The-Top (OTT) distribution. Content owners have recently started to partner with cable/satellite providers to allow exclusive OTT access to cable/satellite subscribers. It is evident both Corporate and PE buyers are focused on evaluating domestic and international providers of content as part of their long-term strategic vision.
• Online gaming - The legalization of online gaming could be a real game changer in 2012 if state regulators move rapidly to establish online gaming regulations, or if federal legislation occurs. Land-based casino operators, gaming manufacturers and suppliers, and social media are all watching these developments closely and will move aggressively to stake a first-mover advantage in this potentially lucrative market. With its strong demand in the US market and natural connection to the popular activity of social media gaming, online gaming is an untapped domestic industry that will interest both corporate and financial buyers.
• Video games - As noted in PwC's Global Entertainment and Media Outlook: 2011 - 2015, the video game industry is expected to grow by $18.2m or 28% from $64.2m in 2012 to $82.4m in 2015, driven primarily by$12.4m in online and wireless gaming growth. PwC anticipates video games segment growth will be driven by online, social media and wireless gaming and expects valuations in these categories to remain strong based on the increasing willingness of consumers to spend on downloadable content and micro-transactions. Increased bandwidth and access to social media along with consumer demand will continue to drive acquisition of niche developer studios and smaller publishing companies with online and social media gaming expertise. Liquidity by the big players is also expected to drive M&A activity in 2012.
• Broadcast television - Since the domestic U.S. television broadcasting markets are dominated by established market participants, the international TV and cable markets continue to present attractive M&A targets for U.S. networks looking to expand via acquisitions or collaborative partnering. Additionally, for those vertically integrated companies with both content and distribution, this allows another outlet to monetize their library and formats for international consumers. This shift is underlined by PwC's 14th Annual Global CEO Survey, as more CEO's in E&M than in any other sector expect to form a new strategic alliances or joint ventures in the coming year.

Cash reserves to fuel M&A

• With over $1.4 trillion in US Corporate cash and almost $1 trillion in uncommitted PE Capital, there is ample cash available to fuel M&A in 2012. Corporate buyers have a slight advantage over financial buyers with their cash on hand, limited exposure to challenges in the credit markets and ability to extract additional value through synergies.

Bankruptcy and corporate debt maturity

• Aided by stabilizing (albeit sluggish) economic conditions and gradually improving credit markets in the first half of 2011 compared to 2010, the rate of bankruptcies and defaults across all U.S. industries continued to decline in 2011 from the record levels of 2008 and 2009. According to bankruptcydata.com, bankruptcy filings (Chapter 11 and Chapter 7) of U.S. public companies across all industries fell by 19% in 2011 to 86 from 106 in 2010. US corporate bond defaults were cut almost in half to 30 in 2011, down from 59 in 2010 and were a fraction of the 191 defaults which occurred in 2009.
• Chapter 11 bankruptcy filings for U.S. based E&M companies declined to 11 in 2011 vs. 21 in 2010 (and 30 in 2009) (1). The overall decline in E&M bankruptcies (vs. 2010) is driven by a lower number of publishing bankruptcies, which are down from 9 in 2010 to 3 in 2011. This trend suggests that the publishing subsector may be approaching sustainable levels after suffering from both the economic downturn and technological advances that have led people away from printed materials. Of the 11 E&M companies that filed for bankruptcy in 2011, 3 have already emerged. Another continuing trend from 2010 is the prominence of section 363 asset sales, credit bids to senior lenders or pre-arranged reorganization plans as vehicles for emergence in 2011 vs. traditional pro-longed 'work-outs'. (footnote 1: Defined as debtors with pre-petition liabilities greater than $100 million, US based E&M companies only.)

• According to S&P, the E&M sector remains subject to heightened credit risk in 2012. Speculative grade default rates for E&M companies (1.9% in November 2011) are expected to approximate 3% by the end of 2012. Despite persistent financing pressures, improving credit markets throughout most of 2011 have allowed E&M companies to refinance a significant portion of near term maturities in the 2012 - 2015 timeframe and further extending maturities across future years. However, approximately $59 billion of speculative-grade E&M industry debt is still expected to come due in the upcoming 2012 - 2014 time period. It remains to be seen whether underlying economic and geopolitical uncertainty will negatively impact credit markets and the ability of overleveraged E&M companies, particularly those in the middle market, to successfully deleverage in the coming months.