Media and telecommunications deals insights: Midyear 2020

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COVID-19 has accelerated the disruption to the Media & Telecom sector

In the face of a massive upheaval to the economy, the impact to M&A in Media & Telecommunications has been more muted, with digital and telecom assets proving to be attractive assets in the COVID-19 era. In total, there were 259 deals in the first half of 2020.

As companies come to grips with doing business in the current environment, we’ll take a look at some of the factors and challenges that will shape M&A in the months and years to come, as streaming continues to disrupt the media ecosystem, advertising demand declines and companies look to become leaner and more efficient.

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“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..”

Bart Spiegel, US Technology, Media & Telecommunications Deals Partner

High level trends and highlights

In the first half of 2020, there were 259 deals, a decline of 19% from the second half of 2019. 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 Q4-19 (albeit, with a weaker Q2). 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.

Announced deal volumes have always been volatile in the sector (largely driven by megadeals) and 2020 is no exception. Announced deal values of $12B and $19B in Q1 and Q2, respectively, fell within the range of the last 8 quarters.

As a percent of total volume, deals with private equity buyers accounted for 33% of deal activity in Q2 2020, the strongest quarter for PE in recent history. Private equity firms started out the year sitting on dry powder and ready to invest. We expect to see private equity activity tick up in the second half of the year, as companies struggling through the current economy seek out capital infusions. Given high valuations in recent years, private equity players are likely to take advantage of a buyer’s market, and look for operational efficiencies to grow margins.

While private equity deals continue to be concentrated in the Internet & Information sub-sector, PE firms invested in some notable assets in the first half of the year, including Univision, AdWeek, Outfront Media, Golden Nugget Online Gaming, DoorDash, MDC Partners, Live Nation and Classpass.

Despite borders largely shutting and international travel coming to a halt, inbound deal activity was relatively strong with 49 deals with foreign acquirers in the first half of 2020, or 19% of deal activity. This compares to an average of 14% in 2018 and 23% in 2019. From a value perspective, inbound deals accounted for only 3% of announced deal value.

Asia Pacific countries made up the highest proportion of foreign buyers, with 7 inbound deals from Japan and 4 from China across various sub-sectors.

From the European perspective, UK-based acquirers dominated with 12 deals, largely in the Advertising & Marketing sub-sector (albeit, prior to lockdowns beginning).

Outbound deals with US buyers and foreign investors declined from a peak of 59 deals in Q4 2019 to 31 and 32 deals in Q1 and Q2 2020, respectively. Announced outbound deal value was $8.2B.

The most significant outbound deal activity was Facebook’s investment in India’s Jio Platforms for $5.7B in April. By July, Jio Platforms launched a telecommunications platform JioMeet to compete video chat services such as Zoom.



Media & Telecom sub–sector analysis

Deal volumes have held up relatively well for most sub-sectors despite the COVID-19 impact, with the two largest sub-sectors - Internet & Information and Advertising & Marketing taking the brunt of the decline.

After a slow Q1, Internet & Information bounced back a bit in Q2 - in part driven by a slew of investment in food delivery and other digital platforms.

Although most sub-sectors did face some modest declines in the first half of 2020, a few clear winners stood out. Telecommunications has seen some of its strongest quarters in recent years during the COVID-19 era, with deals touching on ISPs, fiber and wireless equipment. And despite advertisers pulling back, podcast-related deals continue in the Music/Audio Content sub-sector - a sign of confidence in their staying power as brands return to advertising.


Media & Telecom deals outlook

Following a turbulent first half of the year as the Media & Telecom sector adapted to doing business in a COVID-19 world, the outlook for the second half of the year remains uncertain. However, opportunistic acquisitions as valuations begin to decline, coupled with pending regulatory changes, pave the way for M&A to help companies on their path toward recovery.

Divesting non-core assets: The current economic environment will likely force companies to be a bit more introspective in identifying specific assets or businesses which they don’t believe will contribute to their earnings growth in the future. With the current crisis hitting on the heels of several years of massive consolidations, companies are sitting on various non-core assets that are ripe for divestiture. We won’t speculate on particular assets that could be up for sale, but let’s take a moment to reflect on the Media & Telecom industry pre- and post- the last global financial crisis. In the wake of that downturn, we saw Disney acquire Marvel, GE sell its stake in NBCUniversal to Comcast, Sirius combine with XM and Time Warner spin off Time Warner Cable, to name a few of the transformative deals of the time. As businesses start to think how to recover from the current crisis, expect to see some shake ups.

Operational efficiencies: Adapting to COVID-19 has forced all companies to find savings in their cost base, whether personnel, property or procurement. It is inevitable that some companies take the opportunity to make some cost rationalizations permanent, whether by merging with competitors, operating at reduced headcount, relying more heavily on technology and automation, or downsizing their physical footprint. The prospect of this is sure to attract private equity investors, who are sitting on significant dry powder. Additionally, the focus on operational efficiencies may force market players to seek out competitors in the market and potentially enter into transactions whereby they can consolidate and realize certain efficiencies.

We would also expect to see upstream or downstream transactions in the value chain as companies seek to generate incremental margins.

Regulatory changes: Recent changes to regulations, and some still in flux, could throw a much needed lifeline to sectors and state governments currently struggling through the COVID-19 era. Following the Supreme Court’s 2018 decision to overturn a federal ban on gambling, most states have now begun their journey to legalizing sports betting in some form. The remaining holdout states are losing out on sorely needed tax revenues as gamblers cross state lines or turn to mobile apps, and could turn to legalized betting to help address budget gaps in the COVID-19 era. Likewise, this has opened up new opportunities for partnerships with major sporting organizations to supply betting platforms with data feeds and to keep viewers engaged while sports are played to largely empty stadiums.

Although we’ve yet to see ISPs aggressively act on the FCC’s 2017 reversal of net neutrality, the COVID-19 induced shift in how we consume content could jumpstart their desire to work with OTT platforms to create seamless ‘fast lanes’ for at-home film releases.

Perhaps next on the chopping block could be the FCC’s cap on TV and radio station ownership. The decades-old rules seek to prevent any one entity from dominating the media and therefore controlling the public discourse, but with further evidence that people are obtaining their news from a variety of sources, primarily digital in nature, will that serve as an evidentiary catalyst to usher in a new set of rules?

Additionally, in late 2019, the DOJ filed a motion to terminate the Paramount Decrees which have prevented studio ownership of movie theaters since 1948, similarly acknowledging that economic conditions have changed.

Sub-sector outlook

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. Let’s take a look at some of the trends emerging as the industry transforms in the face of unprecedented challenges, and how they might shape M&A.

The looming content shortage: 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.

Acceleration of disruption: Despite stay at home orders for much of the first half of the year, record high households have dropped their cable or satellite TV package as more streaming platforms have entered the fray. 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.

Advertising through a recession: Ad agencies are among the hardest hit by COVID-19 in the Media & Telecom sector, with most advertisers pulling back on their spend as a reflex to lockdowns. As the economy starts to push on in the face of COVID-19, we expect advertising budgets to be slashed and certain sectors to pull back significantly on their spend (e.g. travel or live events). Some advertisers are likely to seek more effective demand generating spend on digital platforms as opposed to mass brand advertising on traditional media. We’ve already seen a sharp decline in advertising deals in Q2 2020, and expect this trend to continue in the near future. Going forward, we expect the bigger players will do a lower volume of deals, but will continue to compete for bigger data-driven assets.

Is the Metaverse 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. 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 start-ups in the metaverse space as attractive M&A targets.

About the data

Our analysis highlights the ongoing changes in the Media & Telecommunications industry due to technology advances, the convergence of traditional and new media, and ever-shifting consumer preferences.

Our analysis was based primarily on individual Media & Telecommunications sectors as defined by Thomson Reuters, with the exception of Telecommunications and Internet Software & Services and E-Commerce, which we have renamed as Telecommunications and Internet & Information, respectively, for the purpose of our analysis. In addition, all deal values disclosed, unless otherwise noted, were determined using transaction value. While in certain cases, enterprise value may exceed transaction value, it has not been considered in our analysis.

We define US Media & Telecommunications transaction activity as acquisitions, mergers, consolidation of minority interests, shareholder spin-offs, divestitures and restructurings. Acquisition targets are defined as US companies acquired by either domestic or foreign acquirers (both corporate and private equity). Cross-border deals in this publication have been limited to announced acquisitions of targets located outside of the United States by US acquirers. Deal value is transaction value as reported.

For transactions where the buyer and target are in different industries, the announced acquisition is counted in both industry deal reports. To combine deal value or volume across reports, one should eliminate the double-counted deals.

Contact us

Bart Spiegel

Deals Partner, PwC US

Colin Wittmer

Deals Leader, PwC US

Marc Suidan

Technology, Media and Telecommunications Deals Leader, PwC US

Ian Same

Principal, PwC US

Edward Calderone

Deals Senior Manager, PwC US

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