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PwC Entertainment, media and communications deal insightsQ3 2015

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Deal volumes continue to stay the course with deal values declining in the absence of cable megadeals. PwC provides a summary of third quarter 2015 deal activity, megadeal activity and an outlook for key sectors.

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PwC Entertainment, media and communications deal insightsQ3 2015

  1. 1. Breaking for intermission US entertainment, media and communications deal insights Third quarter 2015 edition November 2015 A publication from PwC's Deals practice At a glance Quarter in review Megadeals hit pause Cable plays on A foreign acquirer makes some noise Broadcasting’s back on air 2 of the 3 megadeals aimed at consolidating TV footprint Spotlight article: Incentive Auction Tips for broadcasters when determining the walk-away price
  2. 2. Third quarter 2015 update 2 Introduction The headline says it all –2015 megadeals pushed the pause button this quarter and those of us sitting in the audience can only wait and see what Q4 brings – a return of high flying, transformative mega deals driving up deal values or a steady-state deal environment? Only time will tell. Regardless of how things play out in Q4, how to engage and monetize the modern millennial consumer remains the key focus to market players. Just look at Activision Blizzard Inc.'s recent announcement to acquire King Digital (creator of Candy Crush) for $5.9B – a deal which will join traditional console and PC games with mobile. The implications are far reaching as participants in the media value chain continue to evaluate and improve upon their current portfolio and capabilities. With this as the backdrop, it is no surprise that the cable sector rises to the top of the deal value heap with Altice NV’s proposed acquisition of Cablevision, right on the heels of the Charter/Time Warner Cable deal in Q2. Broader M&A volumes within Entertainment, Media & Communications (EMC) sectors were comparable to the same quarter in 2014. Deal values, on the other hand, declined considerably versus Q2, largely attributable to the decline in megadeals. The broadcasting sector continues to consolidate rapidly with over $7B in deal value announced this quarter with Nexstar, Media General and Meredith Corp in the spotlight. In spite of the market fluctuations and the M&A contraction we saw in the third quarter, appetite to initiate organic and inorganic growth strategies remains at a fever pitch. Whether driven by an influx of quality content being developed by traditional and non-traditional players; or changing consumer demographics and preferences; or the ubiquity of mobile and video offerings among industry players, we believe M&A activity across EMC sectors will continue into the last quarter of 2015 and beyond. Besides our summary of quarterly deal activity, we are pleased to spotlight the incentive auctions top of mind for broadcasters nationwide. The strategic considerations are complex but the valuation implications only illustrate the importance of a thoughtful approach to pricing spectrum for auction. As always, we welcome your feedback. Best regards, Bart Spiegel Partner, Entertainment, Media & Communications Deals, PwC
  3. 3. Third quarter 2015 update 3 Third quarter 2015 M&A trends Deal volumes continue to stay the course with deal values declining in the absence of cable megadeals. Coming off a strong Q2, deal volumes during Q3 met some headwinds, declining by 6% to 207 deals. While year-t0-date deal volumes trail 2014 by 4%, quarterly volumes remained above 200, which appears to have been a benchmark over the past three years. Versus the prior quarter, volume declines were evident across a number of EMC sectors, most notably Recreation & Leisure, Music and Cable. Partially offsetting this decline was an increase in deal volumes in the Broadcasting sub-sector, which had been mostly dormant since 2014. That being said, deal values declined notably, to a reported $23B in Q3’15, compared to $76B last quarter (Q2’15), driven largely by the absence of announced megadeals. There were only three megadeals (deals > $1B) announced in Q3’15, which accounted for 71% of total announced deal value during the quarter. We expect deal volumes to remain consistent with prior quarters through the remainder of the year (with quarterly volumes above 200), but are optimistic that core entertainment, media and communications properties will continue to use M&A to expand their portfolio offering. Q3 deal values declined without as many cable megadeals* *Note: Due to the cancellation of the proposed Time Warner/ Comcast deal it has been excluded from Q1 2014 results. Source: Thomson Reuters
  4. 4. Third quarter 2015 update 4 Megadealing takes a breath Following on the frenzy of megadeals announced during Q2’15 (seven megadeals/$71B of value), Q3’15 saw a decline in terms of both volume and value of megadeals to three and $16B, respectively. Announced values were driven primarily by Altice’s $10B purchase of Cablevision Systems Corp and Nexstar Broadcasting Group’s $4B proposed purchase of Media General. It should be noted that during the same period, Media General announced a $2B proposed purchase of Meredith Corp and based on the dynamics of both Media General deals discussed in detail below, only one of the transactions is likely to be completed. Three billion-dollar deals announced Source: Thomson Reuters Below are the Q3’15 billion dollar plus megadeals:  Altice NV/Cablevision Systems Corp – The acquisition of Cablevision would create the fourth largest cable operator in the US and follow on to Altice’s significant US investments during 2015 with the previously announced purchase of Suddenlink during Q2’15. Regulatory approval of both transactions remains outstanding.  Nexstar Broadcasting Group Inc./Media General Inc. – The proposed transaction announced by Nexstar (subsequent to the Media General Inc./Meredith Corp transaction discussed below), would be based primarily on creating a larger Broadcast TV footprint with the combined companies owning 162 stations in 99 markets reaching 39% of American households.  Media General Inc./Meredith Corp. – In a similar fashion to the Nexstar transaction noted above, the proposed transaction announced by Media General would create a larger Broadcast TV footprint with 88 stations that reach 30% of American households. The transaction would also include legacy Meredith publishing assets such as Better Homes & Gardens and Family Circle. As of this publication, it remains uncertain which of the Media General transactions discussed above will be completed.
  5. 5. Third quarter 2015 update 5 Quarter in review: Active sub-sectors Advertising & Marketing leads Q3’15 in deal volume US EMC announced deals by subsector Deal Volume Deal Value* $ in millions Q2 Jun'15 Q3 Sep'15 Q2 Jun'15 Q3 Sep'15 Advertising & Marketing 60 58 1,230 427 Publishing 39 43 1,377 1,030 Internet & Information 29 30 6,246 1,206 Communications 29 26 3,006 2,221 Broadcasting 5 17 47 7,035 Recreation & Leisure 29 15 523 906 Film & Content 10 9 1 113 Casinos & Gaming 4 5 395 203 Cable 6 2 63,035 9,946 Music 10 2 8 - Total 221 207 75,868 23,087 Total Q3 Sep'14 204 18,546 * Represents transaction value and not enterprise value, when disclosed Source: Thomson Reuters Time to hit the gym While acquisitions of major sporting franchises often dominate the headlines, it has been a steady rate of consolidation within the gym and fitness industries that has driven consistent deal volume within the Recreation & Leisure sub-sector. This quarter saw a slow-down in deal volume, from 29 in Q2’15 to 15 in Q3’15, a decline of 48%. Despite this, deal value increased by 73% to $906M, driven largely by Dalian Wanda Group’s acquisition of World Triathlon Corp, a Tampa-based provider of triathlon services, from Providence Equity Partners for $650M. Stay on the line Deal activity in the Communications sub-sector continued its momentum from Q2’15, with deal volumes remaining strong in the current quarter. Consistent with the last quarter, there was interest across a broad range of sub-sectors, from network services/solutions to communication towers and satellites. Both deal volume and value remained steady at 26 deals and $2.2B respectively in Q3’15, compared to 29 and $3B in Q2’15. The return of Communications deal volume to the peak levels of 2014 has now been maintained for two consecutive quarters; which paints a positive picture for future M&A activity. The continued activity in this sector highlights the importance that both Corporate and Private Equity buyers place on the digital infrastructure that underpins our daily lives. Back to the future 2013 and early 2014 saw considerable consolidation and megadeals within the Broadcasting space; as market participants sought to grow scale, capitalize on geographic synergies and cash in on retransmission fees. While this trend appeared to slow in recent quarters, Broadcasting has reemerged in the current quarter as a significant contributor to deal volume and value. Deal volume more than tripled to 17 announced deals in Q3’15, and deal value spiked to over $7B. While TV broadcasting deals provided the lion’s share of deal value, radio broadcasting was also a significant contributor to deal volume. The aforementioned complex dealings between Nexstar Broadcasting Group, Media General Inc. and Meredith Corp. has driven deal value, and it remains to be seen how these transactions will playout. Recreation & Leisure Communications Broadcasting
  6. 6. Third quarter 2015 update 6 Private equity steadies We saw a decline in private equity investment in the EMC space in Q2’15, as certain players paused to assess their own portfolios, while others only had a cursory glance at what was on the market. In Q3’15, PE acquisitions represented 13% of total announced EMC deals, up slightly from approximately 12% in Q2’15. While it remains to be seen whether private equity involvement in the EMC deals landscape will reach the heights of prior quarters, it seems almost certain that they will continue to be key players in EMC M&A activity. Private Equity rises to 13% of US EMC Deals US EMC deals: corporate vs. private equity mix Source: Thomson Reuters Outbound deals Announced outbound deals (US entities acquiring an overseas target) declined from 59 deals in Q2’15 to 53 deals in Q3’15, as US interest in foreign Advertising & Marketing targets slowed. Slightly offsetting this was the re-emergence of Internet and Information Services, which saw outbound deals increase by 75% in the current quarter. Interestingly, outbound acquisitions in India in Q3’15 replaced Canada as the second most popular destination for international deals outside of the UK. Given the deals in India were centered around the Internet and Information Services space, we expect to see continued interest in this market as this sub-sector remains enticing to US investors. Outbound deals still strong EMC cross-border deals by US acquirers Source: Thomson Reuters Private Equity Corporate
  7. 7. 7 PwC US entertainment, media & communications deal insights Spotlight: Incentive Auction deadline looms What broadcasters need to know about evaluating the value of their spectrum The Incentive Auction presents a potential opportunity for broadcasters to monetize a valuable asset, their spectrum, in a new way. Broadcasters, especially those located in densely populated areas where there are more significant shortages of wireless spectrum, stand to potentially realize significant payouts through the relinquishment of their spectrum. Despite this opportunity, broadcasters need to carefully weigh the risks related to their participation, including the costs (both direct and indirect), the potential for business disruption, the efficiency and effectiveness of such a broad initiative, and the potential impact to channel brand recognition. Broadcasters have until December 18th, 2015 to submit an application to the FCC indicating their interest to participate in the auction, and will then have until March 29, 2016 to commit to their preferred form of potential relinquishment of their spectrum. The Incentive Auction is an unprecedented event in that it allows television broadcasters, for the first time ever, to sell spectrum currently used for their broadcast purposes that will subsequently be repurposed for flexible use in mobile communications networks. It will consist of two separate auctions: 1) a reverse auction where the FCC will first purchase spectrum from television broadcasters and 2) a forward auction where the FCC will repack the spectrum set aside for television broadcasters and sell the spectrum acquired in the reverse auction to mobile operators. In the reverse auction, broadcast stations will bid against each other for the right to sell their spectrum to the FCC. The ultimate price received by broadcasters will be a function of the amount of spectrum the FCC is seeking to clear in each market, the number of broadcasters that are willing to relinquish their spectrum in the market, and the proceeds raised in the forward auction. The FCC has set an opening bid price for each station, and that opening bid price will continue to decline in each round of the reverse auction as long as the number of broadcasters remaining in each round exceeds the number of licenses the FCC is seeking to purchase, as illustrated below in an example where the FCC seeks to purchase two licenses in a market. Illustrative Reverse Auction Example where 2 Stations are Needed Round Bid price Stations accepting bid price Stations in excess of clearing target 1 $$$$$$ 3 Stations Dropped out participants repacked into pre-auction band 2 $$$$$ 1 Stations 3 $$$$ 1 Stations 4 $$$ 0 Stations  Market clears/dropped out participants repacked into pre- auction band Source: FCC
  8. 8. 8 PwC US entertainment, media & communications deal insights Participation in the auction is completely voluntary, and even if a broadcaster elects to participate in the auction, they are under no obligation to participate in any subsequent round (after the first round) allowing broadcasters to drop out if they do not receive their minimum desired value. Broadcasters have a number of ways to participate in the auction, many of which allow broadcasters to receive proceeds from the auction while still remaining as an over-the-air (“OTA”) broadcaster, as summarized below. Option Overview Relinquish Spectrum  Relinquish spectrum and receive full amount of auction proceeds.  No longer able to broadcast OTA and cease broadcast operations. A broadcaster could continue to distribute content through alternative distribution models (e.g. cable/satellite, online, etc.). Move from UHF to VHF  Broadcasters that hold UHF (Ultra High Frequency) licenses can sell their UHF spectrum to the FCC, in exchange for a share of auction proceeds plus an assigned frequency in the upper or lower VHF (Very High Frequency) spectrum band. A UHF broadcaster selecting a high VHF option will receive 40% of the proceeds that would have been paid for relinquishing their spectrum while a UHF broadcaster selecting a low VHF option will receive 75% of the proceeds that would have been paid for relinquishing their spectrum. High VHF license holders also have the ability to sell their license and obtain a frequency in the low VHF band, in exchange for approximately 58% of the proceeds that would be received for relinquishing their spectrum.  This option allows broadcasters to continue to broadcast OTA, maintaining their broadcaster status, while still realizing proceeds from the auction. However, broadcasters need to assess the impact on their OTA viewers by electing to move to VHF spectrum. Moving to high or low VHF frequency will also require technical/infrastructure updates. Channel Sharing  Channel sharing involves partnering with another broadcaster in the same market to combine broadcast operations on one transmitter and antenna, with the two broadcasters then sharing the spectrum of the host station (e.g. the channel that does not sell its spectrum). This option allows for partial realization of license proceeds while retaining broadcast capabilities. The selling station and host station must negotiate how the proceeds from the auction will be shared between the two parties.  Broadcasters with duopolies in a given market have the ability to channel share with themselves, effectively presenting the opportunity to receive the full price for relinquishing one of their license while continuing to broadcast both channels OTA and minimizing operational risk.  Channel sharing requires entering into a formal channel sharing arrangement, which will define the legal and operational requirements of the respective parties (including how the parties intend to share the proceeds). Channel sharing will also require technical and operational changes.
  9. 9. 9 PwC US entertainment, media & communications deal insights Stations that choose not to participate in the auction will not receive any proceeds and will be subject to the repacking of spectrum by the FCC, resulting in minor operational changes. As broadcasters evaluate their options with respect to the auction, an analytical framework is required to assess value. Typically, television stations are valued based on a multiple of cash flows or through a discounted cash flow analysis (“DCF”). Such valuation approaches take into consideration the value of a station based on its ability to generate cash flows over time. While these are appropriate methodologies to value a broadcaster expected to continue to operate “as is”, they do not reflect the potential value of a broadcaster’s spectrum in light of the potential auction proceeds (which could potentially exceed the underlying value of the station, especially for smaller stations that do not have significant market share). Selecting among the various forms of participation is a critical decision for broadcasters, and it needs to be informed by a clear business strategy, view of future demand, and financial valuation of each viable scenario. Below are some key factors broadcasters should consider when assessing their walk-away price:  The underlying current “as is” value of each station in their portfolio;  The potential negative impact on value if any stations are removed from the portfolio through a relinquishment (e.g. potential for stranded costs, impact on retransmission rates, etc.);  The number of current and expected OTA viewers for each channel and how the potential loss of OTA viewers from the auction participation strategy;  Costs related to the participation in the auction (e.g. costs related to relocating transmitters, having to invest in new transmitters if moving from UHF to VFH, etc.);  Options a broadcaster may not be able to pursue in the future as a result of their participation in the auction (e.g. opportunities that may be available to broadcasters when the ATSC 3.0 next generation broadcast standard becomes available);  Trends in spectrum prices and the inability to take advantage of opportunities to monetize spectrum assets that could materialize in the future (e.g. the potential for future auction or the ability to license excess spectrum to wireless carriers if there are changes in regulation); and  Tax implications related to the proceeds received from the auction. Given the significant level of proceeds that broadcasters can potentially realize from the auction combined with the strategic implications on their operations, it is critical for broadcasters to perform a robust and thoughtful analysis to determine the best potential outcomes. The evaluation performed needs to be informed by a clear business strategy, view of future demand, and financial valuation of each viable scenario. Each station (and each market) is going to be subject to its own unique fact patterns and thus it is important to make these assessments on a market by market basis and avoid making broad generalizations. Additionally, broadcasters that participate and continue to operate should give consideration to how the proceeds received will be invested or distributed in order to maximize value (e.g. investments in the business, M&A activity, dividends or share buy-backs, etc.). With significant sums of auction proceeds at stake combined with the various risk factors involved, broadcasters must ensure they are prepared with a thorough and balanced strategy to maximize their success .
  10. 10. 10 PwC US entertainment, media & communications deal insights About PwC's Deals practice Smart deal makers are perceptive enough to see value others have missed, flexible enough to adjust for the unexpected, aggressive enough to win favorable terms in a competitive environment, and circumspect enough to envision the challenges they will face from the moment the contract is signed. But in a business environment where information can quickly overwhelm, many smart deal makers look to experienced advisors to help them fashion a deal that works. PwC's Deals group can advise Entertainment, Media & Communications (EMC) companies and EMC-focused private equity firms on key M&A decisions, from identifying acquisition or divestiture candidates and performing detailed buy-side diligence, through developing strategies for capturing post-deal profits, to exiting a deal through a sale, carve-out, or IPO. With more than 9,800 deals professionals in 75 countries, we can deploy seasoned deals teams that combine deep entertainment, media & communications industry skills with local market knowledge virtually anywhere and everywhere your company operates or executes transactions. Although every deal is unique, most will benefit from the broad experience we bring to delivering strategic M&A advice, due diligence, transaction structuring, M&A tax, merger integration, valuation, and post-deal services. In short, we offer integrated solutions tailored to your particular deal situation and designed to help you complete and extract peak value within your risk profile. Whether your focus is deploying capital through an acquisition or joint venture, raising capital through an IPO or private placement, or harvesting an investment through the divesture process, we can help. For more information about M&A and related services in the entertainment, media & communications industry, please visit www.pwc.com/us/deals, and for industry research and insights visit www.pwc.com/us/em or www.pwc.com/us/comms. About the data Our analysis highlights the on-going changes in the EMC industry due to technology advances, the convergence of traditional and new media, and ever- shifting consumer preferences. For purposes of our publication, we have focused on the following sectors:  Communications  Recreation & Leisure  Film/Content  Cable  Broadcasting  Internet & Information  Publishing  Advertising & Marketing  Casinos & Gaming  Music  Video Games Our analysis was based primarily on individual EMC sectors as defined by Thomson Reuters, with the exception of Telecommunications and Internet Software & Services and E-Commerce, which we have renamed as Communications 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.
  11. 11. Third quarter 2015 update 11 We define US EMC 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. Private equity transactions are defined as acquisitions of initial platform companies only. Subsequent add-on acquisitions by private-equity- controlled platform companies are herein classified as corporate transactions. As has been the case over each of the past several years due to undisclosed deal activity, FY14 and YTD15’s disclosed deal volume was significantly lower than total EMC deal volume. Although transactions with disclosed deal values are indicative of overall EMC sector trends, the high volume of undisclosed deal activity is also indicative of growing middle-market deal activity in the space.
  12. 12. 12 PwC US entertainment, media & communications deal insights Contacts Authors Bart Spiegel EMC Deals 646.471.7085 bart.spiegel@pwc.com David Zavoluk EMC Deals 646.471.1019 david.zavoluk@pwc.com Ian Same EMC Deals 646.471.9943 ian.same@pwc.com Silpa Velaga EMC Deals 646.471.8146 silpa.velaga@pwc.com Curt Monday EMC Deals - Valuation 646.471.7780 curt.monday@pwc.com PwC Entertainment, Media and Communications Deals Thomas Rooney EMC Deals Leader 646.471.7983 thomas.rooney@pwc.com Curt Monday Valuation 646.471.7780 curt.monday@pwc.com Farhad Zaman Capital Markets and Accounting Advisory 646.471.5376 farhad.zaman@pwc.com Ron Chopoorian Divestitures 646.471.3491 ronald.chopoorian@pwc.com Michael Kliegman M&A Tax 646.471.8213 michael.kliegman@pwc.com Perry Mandarino Business Recovery Services 646.471.7589 perry.mandarino@pwc.com Michael Boro Human Resources 646.471.0730 michael.boro@pwc.com Chris Vollmer Strategy& 203.570.1555 christopher.vollmer@ strategyand.pwc.com Shafeeq Banthanavasi EMC Cybersecurity and Privacy 415.425.0580 shafeeq.banthanavasi@pwc.com PwC Entertainment, Media & Communications Deborah Bothun US Practice Leader 213.217.3302 deborah.k.bothun@pwc.com Stefanie Kane US Assurance Leader 646.471.0465 stefanie.kane@pwc.com Joseph Atkinson US Advisory Leader 267.330.2494 joseph.atkinson@pwc.com Peter D’Avanzo US Tax Leader 646.471.5611 peter.davanzo@pwc.com
  13. 13. © 2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PricewaterhouseCoopers has exercised reasonable care in the collecting, processing, and reporting of this information but has not independently verified, validated, or audited the data to verify the accuracy or completeness of the information. PricewaterhouseCoopers gives no express or implied warranties, including but not limited to any warranties of merchantability or fitness for a particular purpose or use and shall not be liable to any entity or person using this document, or have any liability with respect to this document. www.pwc.com/us/deals www.pwc.com/us/em www.pwc.com/us/comms

Deal volumes continue to stay the course with deal values declining in the absence of cable megadeals. PwC provides a summary of third quarter 2015 deal activity, megadeal activity and an outlook for key sectors.

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