Media and telecommunications: US Deals 2023 outlook

M&A activity slows after record levels

Following record high deal volumes in 2021, deals volumes and values in the media and telecommunications sector have slowed but remain ahead of pre-pandemic levels. There have been 3,772 deals during the past 12 months, a 26% year-over-year decrease. Announced deal value totaled $624 billion, an 18% year-over-year decrease driven largely by a decline in internet and software services deals.

As we look to 2023, higher interest rates and inflation, coupled with growing geopolitical tensions and regulatory oversight, will require dealmakers to refine their portfolio strategies and be more intentional about deal value creation. The media and telecommunications sector may fare better than others, as it sits at the center of many sectors’ investment patterns and growth strategies. In addition, large corporates with significant cash reserves are regular players in mergers and acquisitions (M&A) in the sector. 

We highlight several key trends that are shaping M&A activity in the sector, including the focus on capital discipline, the continued demand for sports, uncertainties in ad-tech regulation and the decline of the mega deal.

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Focus on capital discipline

Over the past few years, there has been a push to divest non-core assets among companies in the media and telecommunications sector, with divestitures representing more than 30% of total deal value in 2020 and 2021. During the past 12 months, divestiture deal values in the sector declined to $52 billion, 8% of total deal value, as companies shifted their focus back to growing their core businesses. With that said, pressure on valuations may force companies to look at whether the sum of its parts is greater than the consolidated value of the group, giving rise to further divestitures of non-core or potentially undervalued assets and redeploying capital in areas deemed more accretive to the overall business. We’ve already seen chatter in the market addressing some of these high-profile assets.

Many companies in the media and telecommunications sector have significant cash reserves. This allows them to be opportunistic and execute on M&A in an environment when other market participants may be sidelined due to financing constraints and therefore enjoy reduced valuations.

An inflection point

Capital discipline is also expected to play a role in streaming businesses, as we expect many of the key players to refocus their efforts on profitability via more purposeful and deliberate content spend; reduced spend on subscriber acquisition costs, including promotions; reducing customer churn; and the rollout of advertising-based video on demand for some platforms. Over the past several years, these companies have spent a significant amount of capital on content to attract and retain subscribers, however market dynamics and investor expectations are shifting toward capital spend and capital discipline to better measure profitability. 

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“While the next several months may be challenging for certain buyers given current capital costs, the market has historically rewarded those companies that can be bold and aggressive in finding opportunistic M&A when other players remain on the sidelines. Given the pace of change in the Media & Telecom space, we expect well capitalized companies to continue to execute on their M&A strategy, finding accretive and opportunistic transactions to add to their portfolio.”

— Bart Spiegel, Global Entertainment & Media Deals Leader, Partner, PwC US

Key deal drivers

Continued demand for live sports

The demand for live sports continues to drive M&A activity in the sector, with notable activity including the sale of the Denver Broncos. Potential sales of other franchises, such as Manchester United and Liverpool, are rumored to be attracting global interest from high-net-worth individuals, private equity and even some corporates. 

This is coupled with ongoing interest in sports-adjacent industries, including sports gambling; live content and sporting rights; data and analytics; and collectibles, such as non-fungible tokens (NFTs). The advent of live streaming and legalized sports gambling in the United States has created renewed interest in the sector in recent years, with many trying to find creative ways to structure deals and be a part of the action. We anticipate this will continue to be one of the more active sectors in the coming year, affecting the entire sports ecosystem. 

Repurposed theaters?

We’ve seen the box-office recovery after COVID lockdowns take longer than anticipated, while many other aspects of media and telecommunications have since recovered. Whether it’s due to declining screen count, less product or financial challenges, the bigger question is whether this subsector can return to pre-pandemic levels in light of changing demographics, alternative release-window strategies and shifting production slates. To the extent challenging times continue for the box office, it will be interesting to see if this invites any potential M&A — especially since the Paramount Consent Decrees governing licensing rules were terminated in 2020.  

Are video games just games?

Following Microsoft’s announced (and still pending) acquisition of Activision Blizzard, we expect continued interest in the video-game sector for a handful of reasons. This evolving subsector is viewed as the gateway to all things metaverse-related. Market opinions may vary around the immediate relevance of the metaverse, but it doesn’t change the fact that certain market players are moving full steam ahead on this strategy. Additionally, video-game companies have a loyal user base attached to franchise intellectual property (IP), which they can easily monetize via subscriptions, advertising (in their own walled garden) and in-app purchases. While the broader entertainment industry has been reluctant to aggressively invest in new IP, the video-game subsector continues to manage and invest in original IP. Finally, as these companies experiment with new technologies and software, we are seeing alternate applications outside of gaming that will likely provide incremental sources of revenue in the future. Who wouldn’t want a streaming service to offer some form of entertainment beyond video?  

Telco vs. broadband

With subscriber numbers and average revenue per user flattening, the war between telecommunications companies and broadband providers is heating up as they encroach on one another’s territory for incremental revenue and subscriber growth. Plenty is at stake for each of these players: Broadband providers are looking to bundle mobile services, and the telcos are offering fixed wireless access to homes. However the M&A angle isn’t necessarily among these major players, but perhaps the technologies, user interface and back-office infrastructure needed to keep their systems operating effectively and efficiently. While these types of bolt-on deals may not make headlines, they are necessary to ensure the underlying tech powering consumer and B2B solutions are best in class and minimize subscriber attrition. 

Decline of the mega deal

The number of mega deals in the sector declined from 29 to 21 year over year, as companies shifted their focus to more mid-sized deals due to higher interest rates and decreased access to capital. As we look to 2023, we expect companies will continue to seek creative structuring alternatives as buyers and sellers navigate the value gap, given changing expectations in light of rising interest rates. In doing so, we could see a rise in the use of earnouts, which provide downside protection for buyers should company forecasts be impacted by economic headwinds, while also allowing buyers to delay financing part of the valuation in a high-interest environment. Confident sellers can also benefit from making a portion of their proceeds contingent on future performance.   

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Bart Spiegel

Bart Spiegel

Global Entertainment & Media Deals Leader, PwC US

Alan Stephen Jones

Alan Stephen Jones

Technology, Media and Telecommunications Deals Leader, PwC US

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