E&Y has reported that the media and entertainment (M&E) industry will experience a record high number of M&A deals in the coming year.The report surveyed executives associated with film, television, gaming, and print and digital media. Forty percent of respondents are anticipating acquisitions, with more deals in the pipeline thereafter.
Inorganic growth can be a way for companies to explore opportunities related to intellectual property, technology, new geographical markets, and content. M&A is particularly attractive in the current Canadian market. We are seeing confidence in the stability of the economy; a sign that companies may be making more expansive growth decisions. There is a renewed interest in debt financing for major acquisitions thanks to a favorable interest rate term structure. And, companies are improving margins resulting in balance sheets as strong as pre-recession periods.
Topping-off subscription TV
Within the M&E industry, there has been a lot of interest in the video media sector. The consumption of television and movies is changing in exciting ways. Consumers are able to access robust content more liberally and for cheaper than ever before. Over the top (OTT) content delivery, in particular, is gaining traction as a method for consumers to access media. OTT refers to media which is delivered over the Internet without the involvement of a major cable or satellite television operator.With the success of on-demand streaming companies and the threat of illegal downloading, even major telecommunications companies and Canadian broadcasters are stepping into OTT arena.
A recent PwC report notes that the goal for broadcasters and distributors will be to find the right mix of quality product, price, and easy access. While traditional business models are still dominating the Canadian market, there is ample room for M&A to help shape an industry undergoing major digital transformation. In the coming year, we will be seeing a handful of "landscape-changing deals" in the M&E industry. Further, the majority of the M&A deals that are expected next year will be bite-sized, deals below $250M. Predictions are that the predominant type of M&E transaction will be bolt-on acquisitions. These are acquisitions in which the business of the target companies will complement purchasers' current core businesses.
Though there appears to be much excitement around OTT, PwC cautions investors to curb their enthusiasm. Subscription TV is still the dominant delivery method in the video media marketplace and PwC does not foresee a tipping point within the next 5 years. Nevertheless, learning from the experience of the newspaper sector, the M&E sector is aware of the need to evolve rather than hold on to old models. We may see preliminary changes in the next years that may herald a new era for media and entertainment.
The author would like to thank Denise Gan, articling student, for her assistance in preparing this legal update.
Norton Rose Fulbright Canada LLP
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