Buyout Binge: Consolidation Sweeps Reality TV

Looking for scale and global reach, media conglomerates are buying production companies

Since the dawn of the modern reality tv era, the unscripted production business has been a magnet for mavericks. The sector has long been considered the last haven in television for by-the-bootstraps entrepreneurs who have been able to build solid businesses on the back of thin profit margins.

But 2014 marked the crest of a consolidation wave that has been building for the past few years. Small- and medium-sized production entities have been snapped up left and right by the major U.S. congloms as well as Euro and U.K. heavyweights at surprisingly high prices.

Well over $2 billion worth of transactions took place this year, led by the $930 million purchase of All3Media by Discovery Communications and Liberty Global, and the joint venture created by 21st Century Fox and Apollo Global Management to put Fox’s Shine Group and Apollo’s Endemol and Core Media Group under one corporate roof.

The buyout binge has been driven by the yearning for scale and global reach. The acquiring congloms want more shots at getting shows on the air, and they want to have more options to exploit those properties around the world.

To do so, companies like ITV Studios, Tinopolis, Time Warner, NBCUniversal and MGM have pounced on opportunities to buy up independent outfits such as Leftfield Entertainment, Magical Elves, Eyeworks and Mark Burnett’s One Three Media. Even companies that produce lower-profile cable series, such as Bethesda, Md.-based Half Yard Entertainment, have fetched top dollar in the Great Global Rollup.

“The over-arching principle driving these deals is globalization,” says Thomas Dey, president-CEO of About Corporate Finance, an investment bank that has handled a slew of recent sales. “When you’re creating content, you limit the value of that brand if you’re only in one territory. (Buyers) are realizing the value of these smaller companies at a moment when it is getting tougher for independent producers to operate on their current business plans.”

In almost all cases, the biggest assets in these deals are not a library of shows but the wits of the producers who run these companies. The buyers are betting on the value of individual relationships and a company’s track record as an idea machine.

SallyAnn Salsano, creator/executive producer of “Jersey Shore,” is a prime example. After working her way up from production intern to showrunner status, Salsano launched 495 Prods. out of her living room in 2006 with about $7,000, plus “a printer and a fax machine,” as she told Variety in March. Since then, 495 has developed a niche for edgy docu-soaps and relationship-driven vehicles. RTL Group’s FremantleMedia acquired a 75% stake in Salsano’s company in March for about $40 million, with an option to buy up the rest down the road.

The growth in valuations for unscripted production companies is a big shift for the industry. For years, the reality TV sector was seen as having minimal upside, with little to no rerun value for shows over the long haul.

The business model for producers remains a largely fee-for-service proposition, as commissioning networks tend to own the shows outright. Companies with a steady volume of shows can achieve solid cash flow, but there’s no escaping the volatility of cancellation and renewal rates. Burnett — the king of “Survivor,” “The Voice,” “Shark Tank” and more — remains the rare example of a producer who retains a meaningful ownership interest in shows that come from his shop.

As production groups such as ITV Studios and Tinopolis bulk up, the goal is to bring more clout to the table in programming deals. The urge to merge comes as network groups such as Fox, Sony, NBCU and Discovery greatly expand their international footprints.

“Scale matters,” says Cecile Frot-Coutaz, CEO of FremantleMedia. “I don’t think it’s interesting to buy companies just to bulk up. It’s about what skills you have (in production) and what you’re missing. M&A may be a way to achieve that, but what’s right for us probably isn’t right for somebody else.”

Salsano’s 495 was a fit with Fremantle because of her specialties as a producer. And the producer’s sheer doggedness impressed Frot-Coutaz.

“She’s somebody who is very engaged in everything she does,” Frot-Coutaz says. “She understands formats, she’s got strong roots in daytime and dating shows but she’s also done network shows. She’s got that breadth and ability, and she has a very clear point of view about the shows she wants to do.”

Super-producers like Salsano have become highly sought after as the growth of format sales and digital licensing opportunities has brightened the picture considerably for unscripted series to make money downstream beyond their initial outings. Like most U.S. majors, Time Warner is scouring international markets for growth opportunities, which is what made the European distribution infrastructure of Eyeworks an attractive addition to Warner Bros. TV Group’s operations.

With the U.K.-based All3Media, Discovery is looking to enjoy the best of both worlds. The purchase solidifies an important supplier of content to Discovery’s global networks — a hedge against the promise of tougher negotiations to come with larger production groups — and it gives Discovery more chances to profit from format and content sales in other markets.

For producers, the decision to sell after achieving the success that makes them attractive to a larger suitor can be wrenching. It’s hard to get used to the idea of having a boss after years as an independent. But the timing of the wave of deals is not surprising, according to industry insiders. As the marketplace expanded over the past decade and a half, savvy producers were able to build up companies that have reached the point where they are unable to grow much more without major capital infusions and access to international distribution.

Leftfield founder Brent Montgomery says his sale to ITV Studios earlier this year was driven by two major factors: the size of his debt load and the fact that he and his wife were expecting a child. The general upheaval in the U.S. television business — with major cablers facing growth challenges and the advertising business at a crossroads — also made him receptive to buyout offers in a way he wasn’t just a few years before.

“It was the perfect storm,” Montgomery says. “I saw the rough waters coming out of the cable business and content in general — nobody knows exactly where it’s all going to land. Why not partner with somebody who is built to weather the storm?”

Pickup frenzy
2014 was a busy year for buyouts.

February
Seller: Magical Elves (“Top Chef”)
Buyer: Tinopolis
Pricetag: $100m
Seller: Eyeworks Group
Buyer: Warner Bros. TV Group
Pricetag: $273m
Seller: Half Yard Prods. (“Say Yes to the Dress”)
Buyer: ProSieben’s Red Arrow Entertainment Group
Pricetag: $50m for majority stake

March
Seller: 495 Prods. (“Party Down South”)
Buyer: FremantleMedia
Pricetag: $40m for 75% stake
Seller: Raw (“Gold Rush”)
Buyer: Discovery Communications
Pricetag: n/a

May
Seller: All3Media (“Undercover Boss”)
Buyers: Discovery Communications, Liberty Global
Pricetag: $930m
Seller: Leftfield Entertainment (“Pawn Stars”)
Buyer: ITV Studios
Pricetag: $360m for 80% stake

September
Seller: Mark Burnett’s One Three Media, Hearst Corp.
Buyer: MGM
Pricetag: $343m for 55% stake

October
Merger: Fox’s Shine Group, Apollo’s Endemol and Core Media Group
Joint venture partners: 21st Century Fox, Apollo Global Management

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