Media bankers have dreams, just like the rest of us. But unlike most people, they fantasize about blockbuster megadeals that pay super-high fees along with invitations to sunbathe with the media elite in the Hamptons, bike in Sun Valley and ski in Park City.
Unfortunately for them, monster transactions like AT&T’s $109.3 billion acquisition of Time Warner or Disney’s $71.3 billion deal with Fox are in short supply — and analysts vigorously debate whether we’ll see more.
But bankers are settling for the next best thing: the hottest deal market since the dot-com boom of the late 1990s.
“People get so caught up in these big media brands and new market entrants that have big names in Silicon Valley,” says Bart Spiegel, U.S. technology, media and telecommunications deals partner at advisory firm PwC. “But there are just 10 to 15 of those companies. There are tons of others that are playing.”
Thomson Reuters reported $145.7 billion worth of media and entertainment deals across the Americas in the first six months of 2018 — up from $141.7 billion for all of 2017. PwC, looking through a different lens, found $82.4 billion worth of U.S. media and telecom deals in the first half of the year, up 197% from last year.
What makes the market so unusual is that the increase is mostly attributable to deals that are large, not blockbusters. There were only three announced transactions valued at more than $5 billion, led by T-Mobile’s agreement to pay $26.8 billion for Sprint, potentially turning it into the U.S.’ No. 2 wireless carrier.
There were seven transactions valued at between $1 billion and $5 billion. For example, Gray Television committed $3.6 billion for Raycom Media, to create the nation’s third-biggest collection of broadcast stations. And billionaire David Tepper set a record for a U.S. football team purchase with the $2.3 billion he coughed up for the Carolina Panthers.
Agreements of $100 million or less accounted for 70% of the transactions and represented 2% of the dollar volume.
What accounts for the heightened activity? It’s relatively easy to raise cash at a time when the economy is strong and interest rates are low. Many companies also need deals to keep pace with the digital revolution. Broadcast station groups are consolidating in the hope that scale and advances in technology will help them compete with digital video and audio providers.
Bankers still dream that they’ll surf on a wave of blockbuster transactions — especially from cash-rich companies in Silicon Valley such as Amazon, Apple or Facebook that want to fast-forward their video ambitions. Hollywood powers such as CBS, Lionsgate and Sony Entertainment seem ripe for the taking.
AT&T’s acquisition of Time Warner, plus Disney’s fight with Comcast over Fox, “portend tectonic change in the digital media food chain,” independent investment bank JEGI says in a report. The recent deals are “highly defensive, reflecting smart phone saturation, pricing pressure for carrier and cable services, and intensifying competition from Netflix, Amazon and others in the exploding field of streamed content.”
The U.S. District Court for D.C. seemed to clear the way for additional megadeals in June when it rejected the Justice Department’s antitrust objections to the AT&T-Time Warner union. Bankers saw the ruling as a green light for other combinations that might otherwise raise competitive concerns.
But some analysts predict that bankers’ extravagant dreams will remain largely unfulfilled. As Bernstein Research’s Todd Juenger wrote in a July report: “Why buy the whole studio … when instead you can just poach the key talent, offer them more money, more control, more format flexibility, and a huge global audience; and integrate them into your digital culture?”
Another turnoff: Buyers might choke on the high prices many sellers want. Media and entertainment companies worldwide sold for 16.2 times earnings in the first half of this year, up from 15.4 times in the same period last year, although U.S. sales cooled to 10.8 times earnings from 12.8.
“There is some risk that valuations could be getting too high,” Spiegel says. “Once you pay these valuations, are you then going to be able to generate the returns to fulfill your obligations to your stakeholders?” Still, he says, “everybody’s playing in the market right now. This is a good time to be a banker.”