Can complex geopolitical uncertainty and record M&A coexist? Media and entertainment Capital Confidence Barometer June 2017 ey.com/ccb 16th edition

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1 Media and entertainment Capital Confidence Barometer June 2017 ey.com/ccb 16th edition Can complex geopolitical uncertainty and record M&A coexist? Media and entertainment companies consider M&A in their search for growth amid rapid disruption

2 Dealmaking continues at pace with fundamentals driving activity At a time of rapid disruption, political change and policy uncertainty media and entertainment (M&E) companies are proactively managing their portfolio and protecting their core business but a resurgence of economic confidence and positive corporate indicators also finds executives primed for dealmaking as they search for above-trend growth. 69% cite a broad range of geopolitical or emerging policy concerns as greatest risk to their business 70% have increased the frequency of portfolio review process 60% see the global economy improving 57% intend to acquire in the next year

3 M&E companies show flexibility, reimagining portfolios to address ongoing digital disruption EY s 16th Media & Entertainment Capital Confidence Barometer indicates that 57% of industry executives expect to pursue acquisitions in the next 12 months, pointing to a still-strong M&A market after several years of record or near-record activity. M&E executives are shrugging off policy uncertainties and giving the green light to the exploration and execution of strategic transactions that support the growth agenda. The healthy deal environment is supported by optimism about the state of the economy, a positive outlook for corporate earnings and sturdy capital markets. However, there are a variety of risk factors in play that could affect the backdrop, compelling M&E industry leaders to evaluate multiple future paths simultaneously and build flexibility into their strategic plans. The forces driving M&A activity in the sector are well-known and include: ongoing digital transformation; changing customer behavior and preferences; accelerating sector convergence; and, in certain sub-sectors, an increasing need for operational and financial scale. M&E companies are becoming more agile in order to reassess and reinvent their businesses in response to and to capitalize on these forces. Nimbleness is rewarded within this dynamic strategic landscape. In addition to outright acquisitions and traditional mergers, M&E companies are employing a range of transaction forms to achieve their objectives quickly complex commercial arrangements, alliances, early-stage investments and joint ventures are all part of the playbook. Divestitures remain highly-relevant, too, as companies look to shrink to grow and, in some cases, respond to shareholder activists pushing for portfolio change. More than ever, companies that hold back from engaging in inorganic growth activity will struggle to remain relevant in this fast-moving environment. Furthermore, deal execution is always critical. Robust due diligence supported by advanced analytics combined with value-maximizing tax structuring and a comprehensive integration plan will enable M&E companies to succeed in their strategic journey. John Harrison EY Global Media & Entertainment Leader Capital Confidence Barometer 1

4 Macroeconomic environment Signs of a global economic upturn are boosting renewed expectations of growth What is your perspective on the state of the economy today? M&E executives surveyed are bullish about the macro backdrop, with 60% expecting improvement over the next 12 months. A recent pickup in key indicators is driving a strong upturn in the number of executives who see strengthening in the global economy. While this outlook may give a boost to M&E companies existing operations, it is also increasing investor expectations, as targets for earnings growth in 2017 are elevated across all markets. To meet these stretched targets, companies will look to capture this incremental organic growth and compound it with dealmaking strategies. M&E companies will also have to contend with an increase in disruptive competition as an improving outlook will spur investment in innovative start-ups and R&D. Improving Stable Declining Apr 17 Oct 16 Apr 16 A positive shift in outlook and a greater sense of stability in capital markets should foster investment With corporate growth expected to accelerate, credit readily available and valuations seen as improving, companies should feel comfortable accessing capital markets to support investment and M&A strategies. M&E executives overwhelmingly view the markets as stable or improving over the short-term horizon, further boosting the favorable conditions for strategic activity. Please indicate your level of confidence in the following: Corporate earnings Credit availability Short-term market stability Equity valuations/ stock market outlook Improving 41 Improving 46 Improving 52 Improving Stable 39 Stable 36 Stable 30 Stable Declining 20 Declining 18 Declining 18 Declining Apr 17 Oct 16 Apr 16 2 Capital Confidence Barometer

5 Macroeconomic environment Geopolitical unrest and currency uncertainty are seen as key risks to economic growth Risks to companies core business models remain, but with a slightly different complexion. Concerns about rising nationalism have transformed into uncertainty about policy. Government intervention and policies from trade to the movement of labor now collectively top the macroeconomic concerns of global executives. Leading companies are more carefully assessing geopolitical risks and seeking expert advice to navigate these issues. Market volatility also remains on the radar of the C-suites. Any return to the high levels of volatility that frequently shocked markets over the past three years would be a major concern for companies. In relation to historical norms, equity markets are currently high, commodities stable and volatility across asset classes low. Still, companies always remain wary of the potential for an unexpected jump in volatility and its impact slowing decision-making and curtailing investment strategies. What do you believe to be the greatest economic risk to your core business over the next 6 12 months? High volatility in currencies, commodities and other capital markets Restrictions on the free movement of employees/barriers to travel Increasing government intervention in corporate decision-making Slowdown in global trade flows/increase in protectionism Increasing global geopolitical instability 12 Cybersecurity threats 10 Uncertainty about US government policy 9 Economic and political instability in the European Union Financial instability in China, including levels of corporate debt 4 4 Other 1 With corporate growth expected to accelerate, credit readily available and valuations seen as improving, companies should feel comfortable accessing capital markets to support investment and M&A strategies. Capital Confidence Barometer 3

6 Growth and portfolio strategy The need to innovate and to identify new sources of growth are major considerations for the board As the global economic outlook improves, companies and executives are clearly focused on growth strategies, but the rise of digital disruption to products and business models is the constant central consideration. Dealmaking, on both the buy and sell sides, joint ventures (JVs) and alliances are all under consideration by M&E boards as they seek to respond positively to emerging technologies and also to address activist shareholder demands. Increasing sector convergence, largely powered by digital advances, is also becoming a permanent feature of boardroom considerations. Which of the following will be most prominent in your boardroom thinking during the next six months? Impact of digital technology on your business model: e.g. new sales channels/markets, IoT, cybersecurity 19 Identifying opportunities for growth, including M&A, JVs and alliances 17 Sector convergence/increased competition from companies in other sectors Shareholder activism, including returning cash to shareholders Impact of increased economic and political instability 11 Changes in tax policy/rates 9 Portfolio analysis, including strategic divestment (spin-off/ipo) 9 Increasing regulatory or governmental intervention 7 Companies need to take advantage of game changing shifts immediately or risk being left behind. 4 Capital Confidence Barometer

7 M M M M M M Growth and portfolio strategy Disruptive forces compel M&E companies to be more responsive in their portfolio and operational reviews The accelerating pace of innovative and disruptive trends is encouraging M&E executives and companies to review and reorganize their portfolios more frequently as they seek to capitalize on emerging opportunities for growth. Companies need to take advantage of game changing shifts immediately or risk being left behind. M&E sector After the global financial crisis, a wide range of companies developed lean operating models in response to shareholder pressures for earnings growth. This effort has encouraged executives to find efficiencies through outsourcing non-core operations, on the premise that a full focus on core activities enables management to better allocate time and resources, resulting in higher returns. Global increased the frequency of portfolio review 70% process to capitalize on disruptive forces 73% plan to enter into alliances, M&A activities or joint ventures with other companies or competitors to create value from underutilized assets 46% 42% plan to sell or outsource any routine operations or back-office functions in the next 12 months 52% 49% While the future for M&E companies is digital, the transformation faces many internal headwinds More than a quarter of executives are facing difficulties implementing a culture of change management to achieve their vision. Learning best practices from their competitors and the acquired companies is also seen as problematic. What do you think is the most difficult part of digital transformation? Implementing and enabling a digital innovation culture through change management Leveraging digital best practices from acquired companies or successful competitors Understanding and delivering on changing customer digital expectations Establishing a common vision, strategy and clarity of plan in the organization Maintaining competitive position as competitors adopt new technologies Fully capturing the cost saving and potential value creation of digital transformation Capital Confidence Barometer 5

8 M&A outlook Near-term dealmaking is expected to remain at high levels More than half of M&E executives surveyed plan to make acquisitions in the next 12 months. Although 2016 M&A did not top 2015 s record levels, a strong finish to the year and a flurry of dealmaking in early 2017 are fueling executives positive M&A intentions. Improving economic conditions and heightened investor expectations should keep deal flows at elevated levels. Do you expect your company to actively pursue M&A in the next 12 months? Expectations to pursue an acquisition 70% 56% 50% 52% 59% 56% 57% 50% 46% Media and entertainment average 46% 40% 34% 22% 23% 25% Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Robust valuations are encouraging sellers to put assets on the market, and favorable conditions are tempting buyers. Based on the outlook for key deal indicators more than two-thirds of M&E executives express stable to positive confidence in the number and quality of acquisitions, as well as the likelihood of closing deals. However, as the demand for assets increases, some executives see pressure building to find the right target to acquire. 30% Please indicate your level of confidence at a global level in the following: 4% 8% 34% 41% 24% 4% 15% 26% 11% 6% 21% 38% 43% 33% 47% 50% 37% 66% 51% 42% 58% 42% 41% 42% 44% 42% Declining Stable Improving Apr 16 Oct 16 Apr 17 Number of acquisition opportunities Apr 16 Oct 16 Apr 17 Quality of acquisition opportunities Apr 16 Oct 16 Apr 17 Likelihood of closing acquisitions 6 Capital Confidence Barometer

9 M M M M M&A outlook M&E executives plan to replenish their pipelines to enable a range of options Half of M&E respondents report they have three of more deals in their acquisition pipelines. Furthermore, almost half of the respondents expect to increase their pipeline in the near future. Improved economic conditions are a major factor, but other pressures such as ongoing disruption and technological advances are also bringing companies to the deal table. Among the many factors influencing pipeline growth is executives need to consider multiple futures at a time of continuous disruption. In these markets, building optionality into corporate strategies could be the key determinant of success for M&E companies. M&E sector Global % have three or more deals in pipeline 47% expect increase in current pipeline over the 47% next 12 months 36% Improving economic conditions and heightened investor expectations should keep deal flows at near-record levels. Capital Confidence Barometer 7

10 M&A outlook M&E companies look set to retain their focus on expansion to tap into new areas of growth Companies continue to actively pursue deals, with a primary focus on traditional market share growth and expanding into new markets. Strategic growth remains at the forefront of boardroom agendas, and M&A could provide the fastest route to future-proof the businesses to survive in the current environment of technological innovation and digitalization. The emergence of new business models and continued transformation of the market compel companies to look for acquisitions to survive in this disruptive environment. What are the main strategic drivers for pursuing acquisitions? Growing market share 28 Moving into new geographies 26 Acquiring technology or new production capabilities 13 Reacting to customer behavior 12 Acquiring innovative start-ups 11 Top five answers chosen M&E companies are also looking outside their own sector to protect and enhance their customer base in an increasingly competitive environment. The search for customer-centric innovations has led to cross-sector convergence. Companies find themselves entering into transactions and alliances that are very different from those they would have considered in the past with all of the integration and business-focus challenges that come with such ventures. However, the market imperative remains compelling, especially as competitors innovate their own products/services and engage customers in new and innovative ways. The need to maintain a leading competitive market position is critical to protecting earnings and margins. What are your main strategic drivers for pursuing an acquisition, joint venture or alliance outside your own sector? New product or service innovation Reacting to competition 19 Changes in customer behavior 18 Access to differentiated customers, details or databases Access to developed infrastructure/ supply chains Acquiring talent Securing supply chains 6 Top seven answers chosen Companies find themselves entering into transactions and alliances that are very different from those they would have considered in the past with all of the integration and business-focus challenges that come with such ventures. 8 Capital Confidence Barometer

11 M&A outlook Executives are attracted to alliances for their lower risk, relative speed and expanded optionality The fast pace of change compels executives to prepare for multiple futures, which means building flexibility into strategic plans. Such flexibility can be achieved effectively through alliances and JVs. In fact, alliances have taken on a wider, more varied array of structures, driven by the emerging trend of larger companies deploying capital through corporate venture arms. In many cases, these kinds of investments become more formalized later, leading to full takeovers. What are the main reasons for entering an alliance or joint venture as opposed to making a full acquisition? Easier to pursue several options concurrently 17 Faster access to innovation 15 Brand recognition of the partner selected in the geography/product area 15 Lower risk/capital investment than a full acquisition 13 Access to developed infrastructure/supply chains 12 Sharing of capital investment in the market opportunity 11 Regulatory requirements within the given market 9 Blocking a competitor from working with that partner in the future 4 To maximize value of a non-core asset 3 Access to talent 1 Capital Confidence Barometer 9

12 M&A outlook Top investment destinations Improving economic conditions in the US and Europe are attracting investment flows. The combination of a strong uptick in economic outlook, the potential revision of the corporate tax code and positive anticipation of other policy changes makes the US an attractive destination for corporate dealmakers. Western European assets are also in demand, as indicators point to the region finally escaping a decade of stagnation. Which are the top destinations in which your company is most likely to pursue an acquisition in the next 12 months (including your domestic market)? 1. United States 2. United Kingdom 3. China 4. Germany 5. France 10 Capital Confidence Barometer

13 M&A outlook Executives look to new types of diligence to make sure the right deals are struck More than two-thirds of M&E executives have failed to complete or canceled a planned acquisition in the past 12 months, and 40% of them report issues uncovered during due diligence as the primary cause for the cancellations. Due diligence has come to the fore as executives utilize new tools and methodologies to better understand the assets they intend to acquire. More companies than ever are using data analytics to deliver fast and high-quality analysis using unstructured data sets during the diligence phase of deals. Identifying issues that were previously hidden is enabling companies to ask better questions prior to completion. This helps executives find better answers and in turn make better valuation and transaction decisions. Companies are also using advanced diligence techniques to understand how acquired assets can be successfully integrated into their organization and strategy. Integration strategies now need to be tailored to deliver back-office synergies and to enhance front-end customer experiences. Tailored integration also helps companies capture the full potential of future growth. Have you either failed to complete or canceled a planned acquisition in the past 12 months? Yes: 69 No: 31 If yes, what was the primary reason? Issues uncovered during due diligence 40 Unforeseen tax implications 40 Concerns about regulatory or antitrust reviews 38 Concerns about cybersecurity 38 Economic and political instability 31 Competition from other buyers/disagreement on price/valuation 31 Intervention by activist investors 29 Size of target company s pension deficit or other unfunded liabilities 3 Capital Confidence Barometer 11

14 Spotlight Cross-border deals are in focus despite geopolitical and policy uncertainty M&E executives expect to pursue a greater number of international acquisitions in the next 12 months. Half of the survey respondents consider cross-border dealmaking among the top three themes of M&A in the next 12 months. Such deals enable companies to buy into pockets of growth and secure supply chains in an era of geopolitical and policy uncertainty. For larger, more established M&E companies, a major competitive tactic in the coming year will be accelerating growth by acquiring innovative start-ups. These companies will employ a range of acquisition techniques, from full asset purchases to investments via their corporate venture-capital arms. Successful integration will also be key to these large enterprises success, so that they fully capture and nurture the innovation that drove the deal. What will be the main themes of M&A in the next 12 months? An increase in cross-border dealmaking as companies look to secure supply chains and market access 24 An increase in activist investor intervention in M&A, putting pressure on boards to negotiate deals 16 A return of private equity as a major acquirer of assets 16 An increase in hostile and competitive bidding as companies focus on growth through acquisitions 13 A return of megadeal M&A activity 12 An increase in acquisitions of innovative start-ups by larger, established competitors 10 An increase in investment in infrastructure projects and privatization of government assets and operations 9 12 Capital Confidence Barometer

15 Spotlight US policy and Brexit takes center stage as executives consider potential impact on M&A Media and entertainment executives are taking a more ambivalent view toward the new US administration, the UK Brexit decision and the attendant political uncertainty. Some see upsides from the evolving US and UK environments, and the potential investment opportunities in the EU, while others are more pessimistic. Regardless of their disposition, the majority of executives are adopting a wait-and-see stance, with Brexit negotiations about to begin in earnest and key EU elections still to be held. In the US, what will probably determine the actions of companies in the near term is understanding any longer-term reforms for corporate tax. The repatriation of trapped cash by US companies could add a potential US$1 trillion of firepower that may be used in dealmaking. This would provide greater competition for USbased assets, but will also drive US companies outbound, as they look to operate in a new tax environment. Are recent policy announcements by the new US administration creating more or fewer M&A opportunities? More: 25% No impact: 43% Fewer: 32% Are you factoring the possibility of trapped cash repatriation and the potential revising of the US corporate tax code into your M&A strategy? Yes: 46% No: 54% Has greater clarity about the likely route of Brexit increased or reduced your likelihood of investing in the UK? Increased: 22% No impact: 42% Reduced: 36% Capital Confidence Barometer 13

16 10 top actions that help define M&A success in today s deal economy Learn to live with uncertainty Geopolitical and policy uncertainty is a permanent feature of a globalized economy, but technology-enabled disruption poses a greater challenge to many business models. The only constraints are the ones you create New products and services are being created at a pace not seen before being bold could be the key to success as today s deals will likely be tomorrow s game changers. Reimagine the parameters of your business Do what you do best adapt your operating model to succeed in tomorrow s market. Play on your terms Be in total control of your own destiny rigorous and regular portfolio reviews will enable you to be strategically nimble and opportunistic. 14 Capital Confidence Barometer

17 5 6 Your pipeline is your lifeline Competition for quality assets is high, and assessing a number of M&A options is critical to create multiple opportunities in such a fast-moving market. Follow the customer M&A can offer a fast track to the innovation needed to maintain pace with the warp-speed, customer-centric change reshaping today s business landscape. 7 Disregard boundaries Cross-border deals are a necessity successful companies will find ways to navigate challenges such as rising nationalism. 8 Walk through walls The traditional walls that once defined sector territories have dissolved executives need to seize opportunities amid shifting industry models. 9 Measure what matters most Past performance is not necessarily an indicator of future success new ways of focusing and filtering data can provide insights into future customer trends. 10 Integrate with intent Always consider your overarching strategy during integration, and enhance potential value by targeting both top-line customer experience and bottom-line cost efficiencies. Capital Confidence Barometer 15

18 Global contacts For a conversation about your capital strategy, please contact us: EY Global John Harrison EY Global Media & Entertainment Leader john.harrison@ey.com EY Americas Josh E. Putnam Northeast Media & Entertainment Transaction Advisory Services Leader josh.putnam@ey.com Karl Cheng Northeast Media & Entertainment Corporate Finance Strategy Leader karl.cheng@parthenon.ey.com Todd Novak Central TMT Transaction Advisory Services Leader todd.novak@ey.com Brian Stevens Southwest Telecommunication, Media & Technology Transaction Advisory Services Leader brian.stevens@ey.com Dan Buchler West Media & Entertainment Transaction Advisory Services Leader dan.buchler@ey.com Luis Merlini South America, São Paulo Telecommunication, Media & Technology Transactions Advisory Services Leader luis.merlini@br.ey.com EY Europe, Middle East, India and Africa (EMEIA) Olivier Wolf United Kingdom and Ireland Telecommunication, Media & Technology Transactions Advisory Services and Corporate Finance Strategy owolf@uk.ey.com William Fisher United Kingdom and Ireland Media & Entertainment Transaction Advisory Services Leader wfisher@uk.ey.com Dietmar Koesling Germany, Switzerland and Austria Telecommunication, Media & Technology Transactions Advisory Services Leader dietmar.koesling@de.ey.com Eitenne Costes Western Europe and Maghreb Telecommunication, Media & Technology Transaction Advisory Services Leader etienne.costes@fr.ey.com Ranjan Biswas India Telecommunication, Media & Technology Transaction Advisory Services Leader ranjan.biswas@in.ey.com EY Asia-Pacific Ben Kwan China Media & Entertainment Operational Transaction Services Leader ben.kwan@hk.ey.com Shogo Iwamoto Japan Telecommunication, Media & Technology Transaction Advisory Services Leader shogo.iwamoto@jp.ey.com Ishwar Madhyastha Oceania Media & Entertainment Transaction Advisory Support Leader ishwarchandra.madhyastha@au.ey.com Capital Confidence Barometer

19 About this survey The Global Capital Confidence Barometer gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas EY s framework for strategically managing capital. It is a regular survey of senior executives from large companies around the world, conducted by Euromoney Institutional Investor Thought Leadership (EIITL). Our panel comprises select global EY clients and contacts and regular EIITL contributors.. In March and April 2017, we surveyed a panel of more than 2,300 executives in 43 countries. In this survey, we had 105 respondents from media and entertainment companies of which 62% were CEOs, CFOs and other C-level executives. Media and entertainment companies annual global revenues range from: less than US$500m (26%); US$500m US$1b (25%); US$1b US$3b (18%); US$3b US$5b (7%); and greater than US$5b (24%). Global media and entertainment companies ownership was as follows: publicly listed (57%), privately owned (37%), family-owned (5%) and private equity portfolio company (1%). Mergers, acquisitions and alliances in the spotlight as companies seek innovation to redefine their strategy Our latest Global Capital Confidence Barometer continues to find a strong acquisition appetite together with a growing inclination to forge new alliances. Prolonged economic challenges are driving investment decisions and leading companies to ally and cooperate for growth, as well as compete for and acquire for market share. Connect with us at ey.com/ccb. Capital Confidence Barometer 17

20 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Transaction Advisory Services How you manage your Capital Agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you re preserving, optimizing, raising or investing capital, EY s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your Capital Agenda EYGM Limited. All Rights Reserved. EYG no GBL ED 1804 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/ccb