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. 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. 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. 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. 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. 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. 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 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 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 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 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. 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 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