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European media M&A market steady

Thursday, 14 February 2008

European media merger and acquisition (M&A) activity remained strong in the first half of 2007 and is expected to hold up through 2008.

The UK market produced record results for the year as a whole, and mainland Europe held steady, according to the latest Media Insights report released by PricewaterhouseCoopers LLP corporate finance.

The total number of European media deals last year increased by 3 per cent to 178 compared with 173 transactions in 2006. This performance approaches the levels seen at the market’s peak in 2000, when 186 deals were recorded.

Fewer mega-deals

A similar story emerged on the value front last year, with the combined value of European media deals surging to €50bn – a 16 per cent increase on 2006 when deals totalling €43bn were recorded.

Again this is only slightly down on 2000 when deals worth an aggregate €52bn were concluded. Fewer mega-deals were transacted, however, particularly in the second half of the year, and deal pricing was generally more conservative.

While UK deal completions rose by 9 per cent to 75 last year, the total value of these deals soared – largely due to the €13.5bn Reuters takeover by Thomson Corporation.

Deal volumes in mainland Europe were level at 103 while overall value dipped.

Cautious time ahead

Olivier Wolf, media sector leader in corporate finance at PricewaterhouseCoopers LLP, said that activity in the UK M&A market - helped by the Reuters deal - was far more robust than expected, although there was always one mega-deal that took the market by surprise and could boost values.

He explained that 67 per cent of the total deal value was realised in the first half of the year.

Wolf said that this could indicate a cautious time ahead for companies as the economy was watched closely, private equity turned its attention to mid-market and corporates repositioned themselves for the digital age.

“Digital deals accounted for 21 per cent of European activity, about double the level of last year – a trend we expect to continue in 2008 and beyond,” Wolf added.

Mainland Europe resilient

The combined value of the 103 mainland Europe deals fell by 38 per cent to €23bn compared with €37bn in 2006.

No single country dominated the media stage with the largest target deals split between The Netherlands and Spain, with Germany and Italy active on the bidding front.

The largest acquisitions in continental Europe in 2007 were by Germany’s ProSiebenSat1.Media of SBS Broadcasting and Italy’s Mediaset, which led a €3.1bn consortium bid for Endemol in The Netherlands (including the acquisition of a 75 per cent stake from the Spanish telecommunications firm Telefonica).

In addition Spain's largest media group, Prisa, gained control of Sogecable, the local broadcaster, with its €1.9bn purchase of a 50 per cent stake triggering an offer to shareholders controlling the remaining 50 per cent.

In emerging markets, Central and Eastern Europe - particularly Poland, Hungary, the Czech Republic and the former Soviet bloc – are beginning to show opportunities for Western-style M&A, as is Turkey.

Private equity adjusts

The top deals for 2007 were the aforementioned €13.5bn takeover of Reuters by the US-listed financial data provider Thomson Corporation; the €3.3bn acquisition of SBS Broadcasting in The Netherlands by Germany’s ProSiebenSat.1 (both bidder and target are controlled by the private equity firms Kohlberg Kravis Roberts and Permira); and the €3.1bn leveraged buy-out (LBO) of EMI by Terra Firma Capital Partners.

Private equity (PE) interest and activity in the European media market did not disappear in 2007, despite the credit market situation. Firms have, however, had to adapt to the new conditions.

Deal activity by unquoted equity players declined slightly in 2007 following a record year in 2006 in the European media sector.

Deal volumes returned to 2003 levels with 24 completions (2006 – 35). The aggregate value of these transactions was down to €12.5bn from €19bn in 2006 (a tally inflated by the €7.7bn PE backed purchase of VNU).

PE accounted for 25 per cent of the aggregate value of European media deals overall in 2007, compared with 44 per cent in 2006 and 36 per cent in 2005.

Learn to adapt

‘Mega’ PE-deals were mainly confined to the UK, with Terra Firma’s €3.1bn buyout of EMI and the €1.7bn disposal of Emap’s business-to-business (B2B) interests to Apax (in partnership with Guardian Media Group) although the €3.3bn ProSieben/SBS merger in The Netherlands was also PE-backed.

Wolf pointed out that PE players would have to learn to adapt to the challenging debt financing environment, changing interest rates and the resultant competition from corporates.

“Longer hold periods may become necessary with the negative impact of this on returns off-set by more ambitious ‘buy and build’ programmes to drive further value creation. This will generate numerous infill acquisitions,” he concluded.

Digital push

Broadcasting and publishing dominate the European media M&A market in terms of deal value, although the market is more evenly split in terms of volume.

Last year the publishing sector increased its share of the European media M&A market as a whole, in terms of both deal value and volume, to account for 67 per cent by value (2006 – 62 per cent) and 47 per cent by volume (2006 – 42 per cent).

Fuelled by the acquisition of digital agencies, the share of overall deal volume accounted for by marketing services deals rose to 24 per cent from 21 per cent in 2006 with total value down to 4 per cent from 7 per cent in 2006.

The broadcasting segment’s share of the European media M&A market fell slightly last year to 29 per cent of deal value versus 32 per cent in 2006 and 29 per cent from 2006’s 37 per cent of deal volume.

The big change from last year was the rise of the “digital deal”.

What constitutes a digital deal can be highly subjective but even when based on conservative estimates, 21 per cent of European deal activity had a digital component last year. The value of the top ten digital deals doubled to €2.4 billion, from €1.2 in 2006.

Looking ahead

PricewaterhouseCoopers predicts for 2008 that digital will come to the fore. Companies will continue to invest in digital capability and, in some cases, re-position or re-invent their existing businesses to compete in the new world.

The Big Four firm expects a mixed year for private equity. There is likely to be increased concentration of PE activity in the low to mid-market, unless the larger deals market re-opens for business.

There is likely to be a dilemma over exits in terms of timing - whether to keep deals in portfolios and continue to ‘add value’ or to exit investments despite unsettled conditions.

A steady year is anticipated in terms of deal levels in Europe over the next 12 months, with transaction totals running at around the same mark as 2007 with 175 deals.

The combined value of deals is expected to ease down to around €40 bn.

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