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2009: A Challenging Year for Entertainment and Media Deal Makers

Posted on: Friday, 27 February 2009, 08:00 CST

Completed 2008 transaction value exceeded $150 billion due to 2006 "mega" deal backlog; 2008 transaction volume off 17% from 2007 pace

NEW YORK, Feb. 27 /PRNewswire/ -- The U.S. entertainment and media (E&M) industry continued to be an active sector in 2008 with completed merger and acquisition (M&A) disclosed deal value reaching $150.8 billion -- the highest value seen since 2001, according to PricewaterhouseCoopers' 2009 M&A Insights on the Entertainment and Media Industry report. However, deal value was primarily driven by the completion of four "mega" deals previously announced in 2006. Excluding this backlog impact, total disclosed deal value falls to $74.6 billion, a significant decline from prior periods. In terms of overall transaction volume, a total of 1,000 deals were completed in 2008, a decrease of 17 percent from 1,202 in 2007, clearly the result of challenging market conditions. Such deepening economic and credit market uncertainty has resulted in an unpredictable environment for E&M deal makers.

Almost all indicators suggest that E&M transaction activity in 2009 will be significantly less than the previous two-to-three years, according to PricewaterhouseCoopers (PwC). Recent and forecasted declines in advertising and consumer spending are expected to reverberate throughout the E&M industry in the coming year and beyond. It is likely that several E&M sectors will not only be cyclically impacted but also face the prospect of long term structural changes due to both the current environment and the continuing convergence of technology. Pipeline metrics also signal an uncertain year with announced and pending deal value as of December 31, 2008 at $6.7 billion, a significant drop from last year's pending total of $100.8 billion, which primarily consisted of "mega" deal backlog from 2006. In addition, announced E&M deal volume gradually declined throughout 2008 with fourth quarter activity the lowest since the second quarter of 2002.

Despite these challenges, Thomas Rooney, PricewaterhouseCoopers' Transaction Services Entertainment & Media Leader commented that, "With M&A activity ingrained in the DNA of so many companies and the ever growing presence of private equity, E&M deal activity might not be as quiet as many expect in 2009. While the overall value of closed deals will remain below the high water marks of 2007 and 2008, overall transaction volume may prove a bit more resilient. History has shown the E&M industry to be one of the more active M&A sectors irrespective of market and economic conditions."

PwC's analysis identified several key trends impacting the E&M industry and deal market in 2009:

• Declining consumer spending is impacting many entertainment and media companies. There are growing indications that the broader decline in consumer spending that has been driven by declining home values, shrinking savings, mounting job losses and tumbling consumer confidence levels is impacting many E&M companies. As in many E&M sectors, these declines were also exacerbated by the long term trend of technological convergence facing E&M companies as they look to monetize content and adapt to the changing technologies and proliferating distribution platforms of the digital age.
• The overall U.S. advertising market is expected to decline significantly in 2009. Advertising spending is notoriously susceptible to economic conditions, and this recession is proving to be no exception. Advertising budgets have been substantially cut across major client sectors including retail, consumer goods, automotive and financial services. While any such declines will be partly influenced by unfavorable year on year comparisons versus the Olympic and Presidential election year of 2008, there is little doubt that their impact on companies that rely heavily on advertising-based business models will be considerable in the coming year.
• The trend of divestitures will continue as many E&M companies seek to focus on their core businesses. 2008 saw a rising trend of companies electing to divest non-core assets. Of course, those companies that can afford not to sell in the current environment will likely choose to hold onto assets rather than sell at perceived bargain prices.
• Risk averse acquirers will likely focus on small and middle-market 'bolt on' deals in 2009. Several potential "mega" deals have long been speculated within the sector and the completion of one or more such "mega" deals has the potential to skew overall deal figures in 2009. In general, though, the trend in 2008 was towards smaller mid-market deals with the number of E&M transactions with disclosed values of less than $1 billion representing 93% of total disclosed volume. PwC expects the trend towards smaller deals to continue through 2009 and beyond as acquirers adjust to the realities of new credit market conditions.
• Financing remains elusive for private equity investors. Private equity investment has been an important driver of deal activity in E&M in recent years, accounting for around 43% and 40% of announced deal value in 2008 and 2007. With the debt markets still effectively closed to many private equity companies, we expect these investors to remain relatively quiet with new platform investments through much of the first half of 2009 as they focus on current portfolio company holdings and look to put their funds to work in new and innovative ways.
• Investment strategies and financing methods will continue to evolve to cope with the current challenges. In addition to the trend towards smaller deals, the structure of deals has changed over the last year as the credit markets have dried up and financing has become more expensive. Difficulty securing debt financing for deals has also leveled the playing field between corporate and financial players, with the strategic rationale for deals taking greater precedence over the ability to obtain a favorable capital structure. In response, private equity buyers will continue to explore new investment strategies including PIPEs and distressed debt investing ('loan-to-own' strategies).

PwC's report also includes comprehensive analysis for the following sectors in 2008:

• Casino & Gaming saw the most significant growth in deal value which increased over 250%, to $30.4 billion.
• Internet Software & Services (B2B) was the most active E&M sector in 2008 with 305 completed deals accounting for 31% of total deal volume.
• Broadcasting led in deal value with $36.1 billion or 24% of total E&M value.
• Publishing exhibited the largest decline year over year with value and volume decreasing 86% and 37%, respectively.

For a copy of the 2009 PwC M&A Insights on the E&M Industry report, visit www.pwc.com/ustransactionservices.

This report presents a comprehensive blend of PwC's cumulative knowledge and direct experience in the always changing E&M transaction environment. Deal makers in the E&M sector may find the analysis insightful and useful as they evaluate the E&M deal environment over the next 12 months.

About PricewaterhouseCoopers' Transaction Services

The PricewaterhouseCoopers' Transaction Services practice provides commercial and financial due diligence on both the buy and sell side of a deal, along with advice on M&A strategy, valuation, accounting, financial reporting, and capital raising. With over 6,000 deal professionals in over 40 countries, experienced teams are deployed with deep industry and local market knowledge, and technical experience tailored to each client's situation. The Transaction Services team can be involved from strategy to post-deal integration and employ an integrated business approach to uncover the realities of a deal. The field-proven, globally consistent, controlled deal process helps clients minimize their risks, progress with the right deals, and capture value both at the deal table and after the deal closes.

About PricewaterhouseCoopers

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

(C) 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

SOURCE PricewaterhouseCoopers' Transaction Services

Source: PR Newswire

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