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Online TV and video: a corporate finance perspective

Linda Sullivan

Linda Sullivan

Mergers and acquisitions in the media space look set to accelerate this year, says Cavendish Corporate Finance’s Linda Sullivan.

This year promises to be another very busy year for media mergers and acquisitions (M&A), following an exceptionally strong 2015. Last year saw headline grabbing transactions, led by Charter Communications’ acquisition of Time Warner Cable, while transactions bridging different content types featured heavily. For 2016, nearly two thirds of senior industry professionals predict that technology, media and telecoms (TMT) M&A will rise significantly again, according to MergerMarket.

Strategic buyers are cited as the main factor that will drive deal making, with likely targets ranging from the latest content platforms to which consumers are attracted, to content producers catering to millennials and multi-channel networks (MCNs). Through all of this projected activity, the dominant theme is the dissolution of the boundaries between the worlds of tech, media and telecoms, locked in ever-closer competition for prized digital assets.

Many large media groups typically have neither the agility nor the DNA to quickly create a sustainable and scalable foothold in new online markets. Partnerships allow for a low-risk entry route but for many, M&A has emerged as the preferred way forward. The incentives of cash-rich strategic buyers are reflected in rising price multiples, which for the TMT sector as a whole soared by a factor of 30 in Q1-Q3 2015. This is excellent news for middle market innovators which can demonstrate the potential to be scaled rapidly. The appeal of the UK, one of the main beneficiaries of cross-border M&A in 2015, combined with the dynamism of the domestic media sector, set the stage for a rise in cross-border deals – primarily with the US but also, increasingly, China.

TV is not dead, whatever its critics may say. A recent survey found that 31% of people’s time spent consuming media remains spent on TV. Indeed, even among millennials it takes the top spot at 21%, narrowly beating the internet. There is, however, a sea change underway in the pay TV market, as boundaries between online and traditional TV blur and the leading providers of prime content are indisputably no longer only the traditional set of pay TV companies. Growth rates across the market have slowed, and it has reached a level of maturity that in some territories borders on saturation.

According to PwC, the global average annual growth rate in pay TV over 2015-2019 will drop to 3.4% from 5.3% between 2010 and 2014 – and this aggregate rate is largely propped up by emerging markets, while the US and UK are virtually flatlining. This may bring further defensive consolidation in 2016 among large-caps to protect market share, following the example of AT&T’s US$49 billion acquisition of DirecTV last summer which creates a leading position in pay TV and crucially, stands to significantly reduce costs.

The new arena for competition is over-the-top (OTT) TV content and online streaming, fuelled by consumer appetite for quality programmes available both on demand and on devices. Some providers pursue this organically – Sky, Virgin TV, ITV and BT TV have all invested in on-demand platforms that offer increasing flexibility to cope with this behavioural shift. However, non-traditional TV providers are also eyeing this space, with M&A as their chosen route to expansion.

In the middle market, TalkTalk’s acquisition of BlinkBox – subsumed at the start of 2015 in the TalkTalk brand – from Tesco is indicative of telecoms companies’ foray into digital content. As larger groups not native to digital seek to build up their positions over the next few years, there will be increased opportunities for middle market players to join forces with them. At the large cap end, Amazon’s US$970 million purchase of gaming streaming hub Twitch signals a similar determination from non-traditional media players to control the platforms where consumers spend their time.

This can also be expected to generate ancillary deal flow as providers invest in the infrastructure behind online streaming services. In late 2015 Amazon Web Services (AWS) announced the acquisition of Elemental – for a price tag in the region of US$300m – with the aim of improving the experience of online video streaming via AWS platforms. This is an area where demands are only set to rise so we can expect more deal flow in 2016 at the intersection of tech and media.

Looking ahead, it’s likely that more purchases of content platforms will follow in 2016, and increasingly be led by the major tech players rather than traditional TV companies. Aside from the strategic rationale, this is largely a matter of financial muscle: the cash reserves held by the likes of Google, Amazon, Samsung, Microsoft and especially Apple far outweigh the firepower of the major media groups. What is at stake is the ecosystem premium, i.e. the synergies which can be made as each extra portion of consumers’ digital life spent immersed in these companies’ services gives them not only subscription and ad revenue, but also, crucially, valuable real-time data on consumer behaviour that can be monetised elsewhere.

Linda Sullivan is partner and head of media and digital at Cavendish Corporate Finance – a UK-based, independent firm advising exclusively on sell-side M&A.

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