A little less than a year ago, as COVID-19 was solidifying its grip on all aspects of our lives, KPMG published a paper exploring the potential impacts the pandemic was likely to have on the media and entertainment industry. "The balance between work, family, health and well-being might be re-evaluated," we wrote, "with leisure—of which media and entertainment is a large part—playing a greater role in our lives."
Almost a full and very difficult year later, I think this is largely turning out to be true. Some segments of the industry have been just as hard hit as other industries—notably those dependent on social gathering—while others have instead benefitted from the increase in at-home media consumption that came with the same restrictions that put theaters, sports venues and other public events on hold.
To be sure, COVID restrictions and health and safety risks continue to create both operational- and risk/cost allocation challenges. The direct-to-consumer (DTC, a.k.a. streaming) model in particular is unlikely to retreat, despite the inevitability of a return to mass socialization once that becomes reliably safe again. And with vaccines going into more arms every day, the prospects of that return are increasingly positive.
And yet, all this disruption is driving an ongoing shake up in the sector, with new winners emerging, often at the expense of traditional players. Accordingly, there is strong desire and confidence to transact, and credit markets are fully open.
To get as clear a perspective as possible on this situation, I spent a few minutes with Peter Graham, one of our Deal Advisory leaders. In this conversation, which has been edited for clarity and length, Peter shares his thoughts on what media companies looking to make deals in the next few years should be looking out for, given the opportunities available to them.
Lesley Luk: What kinds of M&A activities are you currently seeing in the media space?
Peter Graham: At the beginning of the pandemic, uncertainty levels were obviously extreme, which deferred a lot of investment decision-making and deal activity was very quiet throughout summer 2020. A few of the deals that had been negotiated prior to the pandemic were closed, but that was about it. Then, starting in the fall, the pace began to pick up and we have been seeing lots of transactions of all types. Initial public offerings have been particularly strong since last winter.
Everything is wide open right now—but windows of opportunity can close very quickly. Capital and credit markets are strong, and covenants are reasonable. We're also seeing good competitive tension among lenders, which means great borrowing terms. But there is no way to know how long it will last. Valuations are strong, so it's a seller's market: you can typically attract multiple interested and serious buyers, which allows for the strong valuations and the odd pre-emptive bid. If you can run a process with some competitive tension, you can generally get a good price. If it's not a sale, you can still raise money at attractive valuations, for instance if you want to keep the company private or sell off a stake to an investor.
The trick lies in seizing the right opportunity. And the solution is to be prepared.
LL: Ok, so how does a company prepare to pursue a deal?
PG: Well, first you have to be realistic and honestly assess all your strategic options. Help from an advisor will allow some challenge to your thinking. For example, if you decide to sell and take your business to market, how will you articulate the unique characteristics of the business' growth trajectory both to date and going forward—i.e., your "value story"? Learn how your business might be valued by external parties and then you can understand the various value-drivers. Can you implement some value-enhancing strategies now that will result in higher sales proceeds when you go to market? Examples of actions to capture value upsides include implementing an operational restructuring initiative to drive cost efficiencies, acquiring complementary businesses, and better managing working capital to reduce the amount of cash tied up on your balance sheet.
LL: That sounds like a lot to think about. What would you say are the three top takeaways, or action items, for those planning to do something in the next five years?
PG: I would say the first thing is to ensure you align your various stakeholders on your value story. Then avoid leaving value on the table with a focus on enhancing those value drivers as you prepare your business for potential sale. And, finally, as a financial advisor, I must stress the importance of having real data available to provide investors with reliable financial information that can validate your story and business plan. Since uncertainty results in lower valuations, real data can help to increase investor comfort and confidence as they work through the process of assessing your business.
Is your media business looking to divest or sell in the foreseeable future, but you have more questions? Connect with Peter and get all the answers—and advice—you'll need.