Turning Tide - The prospects for media M&A in 2011

• Increased activity in Q4 2010 shows signs that the recovery is strengthening in media M&A;
  
• M&A to be a key driver of digital transformation for media companies in 2011;
  
• Continental Europe in particular beginning to accelerate; UK increase more steady.

50% of all mergers & acquisitions (M&A) by value in the media sector for the year took place in Q4 of 2010. This increased activity in Q4 2010 shows signs that the recovery is strengthening in media M&A and PwC expects the upswing to sustain through 2011, gathering more momentum as the year progresses. The expected upswing in M&A will reflect strengthening economic recovery, and in particular improving advertising revenues. PwC also expects M&A to play a key role in shaping digital transformation strategies for media companies.

Nick George, media and entertainment strategy partner at PwC, said: "Economic recovery, technological change and easing credit conditions will drive the M&A market this year. Certain sub-sectors should be particularly active, such as TV, which is buoyed by 10-15% increases in advertising revenue year on year, although there remain regulatory hurdles to overcome (e.g. affecting News Corporation's tabled acquisition of BSkyB). Film and related industries such as visual effects, which are also on the back of a strong year and M&A activity in 2010 (e.g. Doughty Hanson's acquisition of Vue Entertainment Holdings), could see further activity in 2011.

"However, further re-structuring cannot be ruled out as persistent structural challenges affect key sub-sectors. Therefore a second round of re-structuring may hit the sector in 2011, as lenders re-appraise performance in light of evolving cyclical and structural trends. 2010 was a relatively quiet year for media restructurings, after the plethora of re-structuring deals in 2008/9 brought on by the recession."

Greater confidence returns

After the market low-point for volume and value of media deals in 2009, greater confidence and activity is returning to European M&A markets. There were 110 European media deals that concluded in 2010, representing €12* billion in deal value, up over 90% on the €6.3 billion value recorded in 2009.

Although the number of completed deals in the second half of 2010 (H2) was down on the first six months (H1), 44 deals vs. 66, the value of completed transactions was just short of €7.4 billion, which is an increase on the €4.6 billion in the first half of 2010 .

Andy Morgan, head of media corporate finance at PwC, commented: "Through the downturn it remained the case that appetite was high for quality assets, albeit there were few sellers amid the economic uncertainty. Going forward we expect bigger deals, driven by an appetite among investors to back growth plans in the context of an improving economic outlook, and slightly easier financing conditions."

The UK and in particular Continental Europe beginning to accelerate

The upward trend in M&A activity is most evident in Continental Europe (excl. UK), where deal values increased for the third successive half-yearly period. 32 deals were recorded in the second half of 2010, down slightly on the 37 deals in the first six months, representing €6.3 billion in deal value, significantly up on the €3.7 billion in the first half of the year.

The UK also saw a pick-up in deal values over the latter part of 2010 (€1,156m in H2 vs. €838m in H1), although the rate of increase was slower than in Continental Europe and the overall deals value for 2010 (€1,994m), was 25% down on 2009 (€2,653m).

The largest transactions of 2010 were Liberty Acquisition Holdings Corp €4.8 billion Q4 acquisition of Promotora de Informaciones SA - PRISA (57.7% stake) and EQT's Q1 acquisition of Springer Business Media for €2.3 billion.

"Mega deals were few and far between, and beyond these headline grabbing transactions, deal values dropped considerably in 2010.

"Other notable acquisitions over the year included Time Warner Inc's €145m acquisition of TV production company Shed Media, BSkyB's €191m acquisition of Virgin Media TV Channels, CME's €300m acquisition of bTV, and Doughty Hanson's €520m acquisition of Vue Entertainment Holdings," said Morgan.

Where Next? Momentum builds for 2011

George, said: "Given the structural changes in the sector and the rise of digital media companies who operate in a less regulated environment, we may see the regulation in the traditional media sector relax, which could permit more consolidation as the playing fields even out.

"Private equity firms, who have been significant acquirers of media assets over the last five years, appear to be readying assets for sale. Further acquisitions should also be driven by technology change, in particular the embrace of digital by European media companies.

"Digital is impacting virtually every sub-sector of media, with even the most "traditional" of segments such as books and magazines now seeing strong digital impacts from e-readers and tablet devices. Revenue growth is increasingly digitally driven, and having weathered probably the worst of the downturn, media companies will look to digital M&A to drive the top-line."

Morgan added: "The structural challenges facing certain segments of the media market mean the sector remains a testing one in terms of M&A outlook. However, there is a clear return of confidence in the M&A market which, combined with greater stability and liquidity in the credit markets, sets a good platform for an upturn in activity in 2011."

*Exchange rate: €1/R8.85

Source: Dealogic and Mergermarket