Media moguls pursue M&A to survive and thrive

Media M&A deal value hit its second-highest year on record in 2017, as the need for traditional media groups to build scale led to a number of market-defining deals

Rapid consolidation across the media industry is pushing a series of landmark megadeals over the line. In 2017, there were 555 deals globally across the sector worth US$131 billion—the second-highest value total since 2008.

Of these, there were 164 deals worth US$103.4 billion announced targeting US companies. Following record 2016, landmark transactions included Walt Disney’s US$68.4 billion pending acquisition of Twenty-First Century Fox, Discovery’s US$14.4 billion offer for Scripps Networks and Sinclair’s US$6.6 billion bid for Tribune.

Defensive moves

This surge in activity has been driven by the recognition among traditional media firms that they urgently need to consolidate and build scale in order meet the competitive challenge technology firms pose to the industry.

Amazon’s streaming service has more than 60 television series and 20 films in production, and Netflix has laid out plans to invest up to US$8 billion in its own content over the coming year with a view to making its library 50 percent original content by the end of 2018.

The value of scale means that dealmaking is likely to continue apace through 2018, as studios and content producers that haven’t yet pursued deals accept that they will have to do so. JP Morgan analysts have predicted that Viacom, AMC Networks and Lionsgate Entertainment could all turn to M&A in order to bulk up and gain leverage.

Studios that are still predominantly focused on providing traditional cable offerings—such as Viacom and Discovery—are particularly likely to pursue deals in order to hold their ground against disruptive distributors such as YouTube TV, Hulu and DirecTV.

“Old” media in consolidation mode

Although dealmaking in the broadcast and film studio space has dominated headlines, “old” media publishing is also expected to undergo a period of significant consolidation.

Analysis by the Pew Research Center in 2017 showed an 8 percent decline in US weekday newspaper circulation in 2016 and a 10 percent fall in advertising. Total advertising revenue for the industry is a third down on what it was a decade ago, and newspapers and magazines are being pushed to consolidate in order to defend against these falls in advertising takings. 

Meredith Corporation’s US$2.8 billion agreement to buy Time and Sinclair’s US$6.6 billion move for syndication group Tribune Media are key deals that the industry hopes will spark further transactions. While the sector is clearly in need of consolidation, it has been held back by funding difficulties.

The involvement of private equity firms in the sector should provide key financial support and bring more capital into deals for print and publishing assets. Meredith’s agreement to buy Time, for example, was boosted by US$650 million in equity from Koch Development Capital. Other buyout firms are also said to be looking closely at the sector.

Favorable regulatory changes set to spark deals

In addition to the consolidation trend across publishing and broadcast, media dealmaking is likely to build momentum thanks to favorable regulatory and tax reforms.

The Federal Communications Commission (FCC) has withdrawn rules that prevented the same company from owning a television station and a daily newspaper within the same market. It has also limited the number of TV and radio stations one entity could own within a particular market. From an M&A perspective, the reforms open the way for media companies to diversify, build scale and improve margins.

In the case of the Sinclair/Tribune deal specifically, the changes mean that Sinclair will no longer have to divest various assets in order to receive FCC clearance. Other media companies including Nexstar, Tegna and CBS are all reported to have said rule changes will increase their expansion opportunities.

The newly imposed US tax bill, which became law at the end of 2017, is expected to provide additional support for media deals. Earnings held overseas and repatriated to the US will be subject to a one-off tax of 8 percent on illiquid assets and 15.5 percent on cash, freeing up capital for deals. The new tax package also reduces corporate tax, which will be especially beneficial for media companies, which typically have higher headline rates.

Looking ahead

After two years of record deal activity, M&A in the media space shows little sign of abating. Broadcasters and studios will have to continue building scale in order to keep pace with the rise of technology companies in their core markets.

Meanwhile “old media” publishers need to find strength in numbers in order to ride out falling advertising revenues. These strategic imperatives for M&A will be further supported by favorable tax reforms and a relaxation of rules on media ownership. All the pieces are in place for another banner year for US media dealmaking.

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