Private equity firms are ready to pounce on entertainment and IP assets.
That’s the sentiment from industry insiders who are anticipating a wave of acquisition activity early next year. The buying boom will be fueled by intriguing assets that quietly go on the market as the largest media conglomerates shed non-core properties. The fact that content-rich companies like ViacomCBS, AT&T and even Disney to a lesser degree are under leverage pressure to slim down and focus on investing in new streaming platforms means that there will be unexpected opportunities for investors.
Private equity buyers have been proliferating in Hollywood circles over the past few years. They account for an increasing portion of overall deal volume in the media and telecom sector, according to the latest PWC Outlook report for the coming year. PWC estimates that 34% of the 612 transactions in media and telecom from November 2019 to last month were conducted by private investment firms. That’s up from 28% of about the same volume of deals during the same frame in 2019. PWC pegs the total value of 2020 deals in the sector at about $99 billion. The busiest month was September with 86 transactions.
What does it all add up to? A number of private equity giants are looking to capitalize on the changes in the content business that are good for those who would like to have more predictable financial models in content production. The movement of the majors toward global domination with mega platforms like Netflix and Disney Plus and the big swings in the financing models for content production make these businesses more attractive to investors looking for more guaranteed returns on established franchises or those in need of rehab.
Netflix, Amazon, Disney Plus, HBO Max and others are increasingly pushing talent to accept hefty upfront fees in exchange for back-end profit participation points that pay off over time. On paper, this is a more logical model for a sector where the platform buys out rights in 10- and 20-year increments. Producers are increasingly working on a cost-plus model that offers a predetermined percentage of the budget as the producer’s profit margin in licensing negotiations. Disney has led the charge among the mega producers to move the template for talent deals from backend risk — which comes with the threat of costly litigation and forensic accounting — to upfront guarantees with performance bonuses built in.
Those kinds of deal numbers are attractive to private equity investors looking for hard metrics to gauge performance and returns over a long horizon.
Apollo Global Management, Sham-rock Holdings and Red Ventures are among the sizable private equity firms that have been active in media and telecom over the past few years. Shamrock surprised the music world last month with its $300 million acquisition of Taylor Swift’s catalog. Apollo is seemingly poking its nose under the tent for every decent size media deal, including AT&T’s long-running auction of DirecTV.
MGM, Hulu, Lionsgate, Discovery and AMC Networks are among the biggest targets in the traditional entertainment marketplace that could see action in the coming months. As demonstrated by Disney’s show of force on Dec. 10 with its franchise-packed programming plans for Disney Plus, the content business is a game of giants. But the castoffs as the behemoths realign for a new era will present a moment of opportunity for risk-friendly investors with deep pockets and a love of the game.