November 2014 ey.com/ccb 11th edition Media & Entertainment Capital Confidence Barometer Seeking measured growth in a more stable economic environment
M&E Capital Confidence Barometer November 2014 40% Large increase in media and entertainment (M&E) companies expecting to do deals in the next 12 months; highest level in three years 83% Majority seek middle-market deals below US$250m, reflecting a strong degree of prudence 70% Expectation of pipeline growth shows strong motivation to focus on inorganic growth opportunities 45% Nearly half see global economy as stable; helping boost mergers and acquisitions (M&A) appetite after five-year slump 2 Capital Confidence Barometer
Seeking measured growth in a more stable economic environment A note from Tom Connolly, Global Leader, M&E Transaction Advisory Services Our 11th Capital Confidence Barometer for the Media & Entertainment sector indicates a strong focus on building deal pipelines for greater M&A activity over the long term, but near-term expansion plans point to measured M&A volume. While there is some expectation for transformative deals, the majority of our survey respondents are focusing on more prudent, bite-sized deals, which will enable them to expand their core businesses while undertaking more measured risk. Increasing confidence in the stability of the global economy, growth in corporate earnings and accommodating market dynamics bode well for M&E companies to execute on their strategic plans. Meanwhile, strong balance sheets coupled with favorable interest rate term structures are enabling companies to position themselves for debt-financed growth with the goal of realizing greater market share and reach. While current reported pipeline levels are low, the majority of our survey respondents have indicated they will be actively seeking new acquisition opportunities over the next 12 months, with an eye toward improving margins, moving to new geographical markets and accessing new technologies and intellectual property. This is positive news for the M&A market. After years of contraction and stagnation, deal activity globally looks set to grow. And while transformative deals make headlines, the next chapter of the M&A story should be middle-market momentum, taking deal activity to new heights. A note from Pip McCrostie, EY Global Vice Chair, Transaction Advisory Services Our 11th Capital Confidence Barometer predicts healthy growth for M&A globally, which should take the market back to levels last seen before the financial crisis. Acquisitive appetite has increased and deal fundamentals credit, cash and prices are strong, as is confidence in economic stability. The biggest indicator of this positive sentiment is deal pipeline, which has increased by a remarkable 30% since April. In addition, two-thirds of executives expect M&A pipelines to expand further over the next year more than double the number expecting expansion six months ago. As we predicted in our previous Barometer, 2014 has seen a big increase in multibillion-dollar deals. Now, increasing competition at the top end and a renewed focus on growing core businesses will fuel more middle-market deals. The majority of acquisitive companies are now focusing on M&A to strengthen their core business, with an eye to boosting market share, managing costs and improving margin growth. Megadeals are set to continue. However, the next chapter of the M&A story should be middle-market deals fueling an M&A rebound globally. Capital Confidence Barometer 3
Macroeconomic environment Despite a continuation of disruptive external influences, greater confidence in global economic stability is laying the foundation for future M&A. The number of M&E executives that view the global economy as stable has almost doubled in the past 12 months. 4 Capital Confidence Barometer
Executives are confident in the stability of the global economy While fewer M&E executives today believe the global economy is improving, the number that believe the economy is stable has almost doubled. Greater confidence in economic stability allows companies to plan more freely for growth and M&A. Another positive signal is that the number of those who believe the economy is declining has dropped to negligible levels. Q: What is your perspective on the state of the global economy today? 23% 9% Oct-13 68% Improving 25% 11% Stable 64% Declining 45% 3% 52% Outlook for corporate earnings shows strong growth Q: Please indicate your level of confidence in the following at the global level: The number of M&E executives who are confident about the outlook for corporate earnings has increased significantly over the last 12 months. Corporate earnings were very strong in the US in the second half of 2014, with 70% of the S&P 500 beating estimates. However, the Eurozone and the UK were mixed, with currency and regional concerns depressing results. M&E executives remain confident in key economic indicators and in the performance of their businesses as they continue to generate meaningful free cash flow. Corporate earnings Short-term market stability Credit availability Equity valuations/stock market outlook 16% 31% 43% 43% 57% 52% 56% 52% 50% 50% 62% 74% Oct-13 Confidence in market indicators driving positive hiring intentions Q: With regards to employment, which of the following does your organization expect to do in the next 12 months? Improved sentiments are driving positive hiring intentions. Companies are more confident about hiring: almost half expect to create jobs or hire talent, up from 21% in April 2014. Critical to employment growth in the M&E sector is the need for technically and digitally adept workers who can accelerate their company s migration to socially dynamic businesses and commercial digital platforms. 60% 50% 40% 30% 20% 10% 0% 55% 58% 47% 32% 46% 21% 13% 21% 7% Oct-13 Create jobs/hire talent Keep current workforce size Reduce workforce numbers Geopolitical risks loom larger Although they do not expect major shocks to the economic or financial system, our respondents identify geopolitical instability as a potential threat to their business. Driven by tensions between Russia and Ukraine and ongoing conflict in the Middle East, geopolitical issues figure more prominently than six months ago. In contrast, concerns about emerging markets and deflation have both fallen. Q: What do you believe to be the greatest economic risk to your business over the next 6 12 months? Increased global political instability The effects of tapering of quantitative easing Pace of structural reforms in Eurozone Slowing growth in key emerging markets Inflation Deflation 3% 6% 3% 4% 2% 14% 13% 24% 25% 31% 39% 36% Capital Confidence Barometer 5
Corporate strategy M&E companies remain measured and disciplined about how they allocate capital to M&A. M&E companies are focusing their Capital Agenda on optimizing and raising capital in order to engage in future complementary acquisitions that will fit within their core growth strategies. A more robust acquisition market is expected as companies realize the benefits of their strengthened balance sheets. 6 Capital Confidence Barometer
Capital allocation for M&A remains measured and disciplined Q. What percentage of your planned growth for the current fiscal year is explicitly assigned to acquisitions? Compared to six months ago, a greater number of M&E respondents will assign less than 25% of planned growth to acquisitions. This seems to indicate there is a higher degree of prudence and focus emerging to drive the types of complementary acquisitions that fit within the core organic growth strategies of M&E companies. Less than 25% 25% 49.9% Greater than 50% 3% 7% 11% 30% 63% 86% Strong M&E balance sheets will fuel leveraged funding for acquisitions Q. How do you expect your company s debt-to-capital ratio to change over the next 12 months? The number of companies looking to de-lever over the next 12 months has dropped significantly as greater confidence in the stability of the economy enables more expansive decisions to be made. Companies are capitalizing on the current favorable interest rate term structure and are positioning themselves for debt financed growth with the goal of realizing greater market share and reach. Oct-13 14% 39% 47% 51% 17% 32% 30% 49% 21% Decrease Remain constant Increase Capital Confidence Barometer 7
Shareholder activism Activist shareholders influence boardroom agenda The C-suite agenda organic and inorganic growth priorities is increasingly swayed by the growing influence of shareholder activism. This is not a US-only phenomenon as activists are present in publicly held companies throughout the world s developed markets. Q: Which of the following has been elevated on your boardroom agenda as a result of shareholder activism? Select up to two. Cost reduction 49% 33% Cash dividend payments 28% Share buy-back With growing success and greater influence, activist investors continue to rise in prominence as the market enters a new phase of low but stable growth. Cost management, returning cash and portfolio optimization are key areas of focus. M&A will also likely be part of the story with asset sales and acquisitions part of the ever-broadening activist dialogue. As a result, companies are stepping up their efforts to manage shareholder activism, enhancing communication with stakeholders, monitoring signs of activist pressure and performing ongoing portfolio reviews. Q: How are you preparing to manage any shareholder activism? Not applicable 3% 9% Conducting ongoing portfolio review to grow revenue, increase margins and optimize value 9% Nothing: we are confident in our current strategy and not actively preparing for activism among our shareholders Portfolio analysis 29% Conducting an activist audit continue with improvement around cost, efficiencies and performance 10% Making management changes as a result of activist intervention 17% 20% Monitoring early warning signs for activist pressure Strategic divestment 22% Ensuring we have open and proactive lines of communication with our shareholders 32% 6% Spin-off/IPO Acquisition 6% 6% Our shareholders have not raised these issues 8 Capital Confidence Barometer
Massive global changes are reshaping corporate strategies M&E executives expect global megatrends particularly digital transformation, the future of work and global rebalancing to have a significant impact on their business and acquisition strategies. Q: Which of the following will impact your core business strategy most in the next 12 months? Select up to two. Reconfiguring the financial system 7% 10% Cyber security Future of work Broadband networks, mobility and cloud computing are fundamentally changing the media and entertainment business. As companies adapt to these advances, dealmakers will need to decide how they will strategically invest to capitalize on the opportunities presented by new technologies. Front-end early adopters will be the most attractive acquisition targets, offering innovative and nimble strategic capabilities to acquirers. Driven by shifting expectations and needs by both employers and employees, the traditional talent contract is being rewritten. An increasing number of mobile, part-time and selfemployed workers are changing the nature of work and the workplace. The move to a more flexible workforce will provide more opportunities for collaboration and productivity, as well as acquisitions. Dealmaking in many industries, especially those that are high-tech or intellectual property (IP) rich, will center on the battle for talent. Meanwhile, global rebalancing is altering cross-border M&A. In larger developed countries with mature M&E companies, investors are looking to acquire deep content catalogs and market scale. In emerging economies, greater middle-class spending on M&E products and services is attracting investors looking for growth opportunities. Q: Which of the following will impact your acquisition strategy most in the next 12 months? Select up to two. Future of work Resourceful planet 24% 26% Rethinking government Global rebalancing 27% 46% 45% 41% 38% 24% 20% 18% Digital transformation Global rebalancing Rethinking government Resourceful planet Digital transformation 52% Reconfiguring the financial system Cyber security As these global megatrends increasingly alter companies business models and investment strategies, those that are able to understand their impact will be best able to position themselves for future success. 3% Global megatrends Capital Confidence Barometer 9
M&A outlook Global M&A activity continues to indicate confidence in business models and stability in asset valuations. The strongest growth in M&A activity in the coming year will be middle-market momentum (<US$250m) as companies strengthen their core businesses while reducing their exposure to risk. However, M&E dealmakers will need to address current reduced levels of pipeline opportunities. An increase in deal rigor will also require bigger pipelines to support the search for strategically aligned deals. 10 Capital Confidence Barometer
M&E companies are increasingly looking to acquire and are confident in deal market attributes Appetite to acquire hits three-year high Companies appetite to do M&A is at a three-year high, with 40% of executives expecting to pursue acquisitions in the next 12 months. The consistency of a rising positive view by M&E executives in all three critical areas of inorganic growth (likelihood of engaging in deals as well as quality and number of available targets) bodes well for expansionary undertakings. However, dealmaking challenges still persist: just under half of executives are confident about the likelihood of closing acquisitions. This may be because of increasing rigor in the search for strategically aligned assets, more thorough due diligence or greater competition. Q: Do you expect your company to pursue acquisitions in the next 12 months? Expectations to pursue an acquisition 40% 30% 20% 10% 25% 22% 29% 23% 35% 25% 34% 31% 40% 40% Oct-12 Apr-13 Oct-13 Global respondents Media and entertainment respondents Q: Please indicate your level of confidence in the following at the global level: Likelihood of closing acquisitions 33% 42% 45% Quality of acquisition opportunities Number of acquisition opportunities 41% 50% 55% 56% 54% 56% Oct-13 Global M&A activity continues to indicate confidence in business models and stability in asset valuations Q: What is your expectation for the global M&A market in the next 12 months? 5% 2% 1% The positive performance of the deal markets in 2Q14 is boosting the outlook for M&A. Almost half of survey respondents see growth in the number of expected transactions while 50% believe deal volumes will continue along the pace of the past six months. The number of respondents anticipating a decline is now negligible, indicating increased confidence in future dealmaking. 21% 74% Oct-13 Improve 33% Stay the same 65% Decline 50% 49% Capital Confidence Barometer 11
Middle market A shift towards middle-market reflects a greater degree of prudence Q: What is the maximum single deal value expected over the next 12 months? Oct-13 83% 14% 3% 48% 52% 79% 14% 7% US$0 US$250m US$251m US$1b Greater than US$1b With the appetite to acquire at its highest for three years, we expect a new wave of M&A activity within the media and entertainment industry with a focus on bite-sized, middle-market deals. This new middle-market momentum should lift M&A activity as companies seek to strengthen and expand their core businesses while limiting their risk exposure. The majority of companies are focusing on acquiring businesses in their core sectors, with an eye to improving margins, moving to new geographical markets and gaining access to new technology and intellectual property. As cost efficiencies are paramount, for the vast majority, planned M&A activity will consist of bolt-on acquisitions that will complement their current business model. While the majority of companies are focusing on acquiring bolt-on businesses, more than a third still expect to undertake transformational deals. The result of these two diverging trends should be an increasingly active deal market. 12 Capital Confidence Barometer
Expected growth in deal pipeline indicates strong future demand for M&A activity in the sector Positive outlook for pipeline growth The number of M&E companies reporting five or more deals in their pipeline has declined, suggesting a serious culling and a laser focus in dealmaking, which is forcing companies to thoroughly examine investment opportunities to find the best strategic fit. However, the strong growth in executives expecting their deal pipeline to increase (from 30% six months ago to 70% currently) indicates a recognition of the speed of change in this environment and a future premium on meaningful inorganic needs. This move toward larger pipelines bodes well for a rebound in M&A volumes in the long term especially in the middle market, where there are complementary assets that will fill out existing portfolios. Q: How do you expect your deal pipeline to change over the next 12 months? Increase No change Decrease 3% 10% 27% 30% Q: How many deals of all sizes do you have in your pipeline today? 60% 70% >=5 16% 31% 4 7% 11% 3 14% 17% 2 28% 43% 1 16% 17% Capital Confidence Barometer 13
Stable valuations to enable dealmaking Modest valuation gap and confidence in asset prices underpin positive deal sentiments Our survey respondents share a strong consensus. Half of M&E executives see only a small discrepancy between buyers and sellers expectations on asset valuations. This, combined with the outlook for stability in the valuation gap and the overall value of assets, will encourage dealmaking in the near term. Q: How do you think buyers expectations compare to sellers expectations (valuation gap)? Significantly higher (25% or more) Somewhat higher (10 25% or more) The gap is small (10% or less) 5% 0% 3% 42% The number of respondents that see the current valuation gap as either higher or lower than 25%, which would be difficult to resolve through negotiations, is now down to only 3%. Somewhat lower (10 25% or more) Significantly lower (25% or more) 50% The more stable outlook for both the valuation gap and price of assets in the next 12 months reinforces the view on stability in macroeconomic conditions and the M&A market. This stability in valuations may allow more productive negotiations on asset sales, but it is also a reflection of modest growth expectations and a focus on core strengths. As buyers become more confident in newly acquired assets long-term value, and sellers no longer hold out for higher prices in the future, volumes should accelerate especially in the lower middle market, where the valuation gap is most easily bridged. Q: Do you expect the valuation gap between buyers and sellers in the next 12 months to: Contract Stay the same Widen 4% 13% 18% 18% 20% 28% 59% 62% 78% Oct-13 Q: What do you expect the price/valuation of assets to do over the next 12 months? Increase 36% 43% 51% Remain at current levels 42% 44% 58% Decrease 6% 7% 13% Oct-13 14 Capital Confidence Barometer
Dealmaking focuses on core business Acquisition plans center on core M&E companies are very diverse in what drives their M&A agenda. The majority of companies are focusing on acquiring businesses in their core sectors, with an eye to managing costs, moving to new markets and accessing new technology and intellectual property. This is strongly aligned to their focus on organic growth plans. Interestingly, while tax inversions and other tax strategies are top of mind from a governmental perspective, only 3% of M&E respondents view it as a main driver for M&A. Companies are planning to strengthen and expand the core. They are assessing a range of transaction drivers but cost efficiencies are paramount. Consequently, for the vast majority of companies, planned M&A activity will consist of bolt-on acquisitions that will complement current business models or be in adjacent sectors. In the current climate, transformative M&A high-value acquisitions that significantly change the size of the acquirer and deals that shift the scope of their business look set to continue. A third of M&E respondents are considering such transactions. However, mid-market deals look set to drive volume in the M&A market over the coming 12 months. Q: What are the main drivers impacting your M&A strategy over the next 12 months? Select up to three. Reduce costs, improve margins Move into new geographical markets Access new technology/ intellectual property Improvements to supply chain Move into new product/services areas Gain market share in existing geographical markets Acquire talent Acquire assets at a discount opportunistic M&A Optimize tax efficiencies Navigate regulatory issues Leverage regulatory/ legislative opportunities 45% 41% 43% 35% 44% 34% 19% 32% 36% 31% 36% 24% 28% 19% 15% 11% 3% 7% 5% 3% 2% Global respondents Media and entertainment respondents 55% Q: Are your M&A deals planned in or outside your core sector? Q: Your planned M&A activity will mostly be: 5% 20% 75% 33% 67% We are looking to acquire competitors/similar companies in our core sector We are looking both inside and outside of our core sector We are looking outside of our core sector Bolt-on (complement current business model) Transformative (high value acquisition which significantly changes the size of acquirer) Oct 14 Oct 14 Capital Confidence Barometer 15
Companies are focusing their cross-border M&A activity around a core group of developed and top-tier emerging countries. The US and UK continue to attract material inbound M&A investment, while China, Brazil and India are destinations of high promise for our survey respondents. 16 Capital Confidence Barometer
Top investment destinations Top investment destinations Brazil China India United Kingdom United States Brazil presents attractive customer dynamics. With a large population speaking a single common language, a population that is highly video engaged with high television viewing but low internet and digital penetration, the future migration to digital platforms and multiple screen use is very motivating for M&E companies. Regulatory limits, taxation and currency challenges are a focus of concern for acquirers, but Brazil warrants a high level of interest as a present and longer term investment and acquisition target market. China possesses so many avenues of growth for M&E. The embracing of cultural investment by the government, the expanding per capita income and rising middle class, the high and increasing levels of mobile and digital penetration, the proven success of media distribution companies founded in China, and an overwhelming desire for rich and robust educational and entertainment content are keys to the attractiveness of China as a market that M&E companies recognize. Regulatory, privacy and piracy concerns are factors that must be weighed in the capital allocation decisions. India s deal market is expected to improve. Investor sentiment is seeing a significant recovery, with stock markets hitting all-time highs. In addition, India s large population, new probusiness government policies, and the historic embracing of media, sports and entertainment by its people keep India as a focal point of future opportunity. The UK has long been a favored destination for foreign firms wanting to access the wider EU market. With a strong domestic growth forecast through 2014 15 and a focus on reducing onerous red tape, the UK should be able to continue this trend. The US M&A market is attractive to foreign investors, thanks to improving economic fundamentals and strong corporate earnings. In this positive transaction environment and with an interest rate rise not expected before early 2015 we expect high levels of deal activity to sustain over the coming months. Capital Confidence Barometer 17
M&E companies are focused on optimizing their allocated capital Q. On which of the following capital management issues is your company placing the greatest attention and resources today? Raising: Do we have the right capital structure to meet our strategic priorities? With an active focus on growth and healthy balance sheets, companies are expecting to take on more leverage to fund deals; 33% of M&E executives expect to focus on raising capital. Investing: What is the best way for our company to grow and is it aligned to our core business? Companies are actively beginning to focus on investment, building dealmaking rigor and discipline, and setting the stage for later growth; 15% of M&E companies are devoting their attention and resources to investing. Preserving: How can we improve the performance of our assets? As companies come out of survival mode and focus on growth, executives are no longer focused on preserving capital but are now turning to other Capital Agenda areas. Optimizing: What steps can we take to maximize our portfolio s performance? 52% of M&E executives are planning to optimize capital and preparing to increase their focus on strategic dealmaking. In the current year, M&E companies have been building their war chests in anticipation of future acquisitions. 18 Capital Confidence Barometer
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 the Economist Intelligence Unit (EIU). Our panel comprises select global EY clients and contacts and regular EIU contributors. In August and September, we surveyed a panel of more than 1,600 executives in 62 countries; more than half were CEOS, CFOs and other C-level executives, and more than 90 were from the media and entertainment sector. Companies annual global revenues ranged from less than US$500m to greater than US$5b: <US$500m (23%), US$500m US$999.9m (26%), US$1b US$4.9b (33%), and >US$5b (18%). Global company ownership was publicly listed (72%), privately owned (19%), private equity/portfolioowned (6%) and government/stateowned (3%). About this survey Capital Confidence Barometer 19
Contact us For a conversation about your capital strategy, please contact us. Global Thomas J. Connolly Global Media & Entertainment Transaction Advisory Services Leader tom.connolly@ey.com +1 212 773 7146 Americas Paul Sheahen Northeast Media & Entertainment Transaction Tax Leader paul.sheahen@ey.com +1 212 773 5578 Dorian Swerdlow Northeast Media & Entertainment Transaction Integration Leader dorian.swerdlow@ey.com +1 212 773 6179 Dan Buchler West Media & Entertainment Transaction Advisory Services Leader dan.buchler@ey.com +1 213 977 7654 Javier M. Rovira South America Media & Entertainment Transaction Advisory Services Leader javier.rovira@ar.ey.com +5411 4875 4716 Europe, Middle East, India and Africa (EMEIA) William Fisher United Kingdom and Ireland Media & Entertainment Transaction Advisory Services Leader wfisher@uk.ey.com +44 20 7951 0432 Atul Mehta India Media & Entertainment Transaction Advisory Support Leader atul.mehta@in.ey.com +91 226 192 0210 Ajay Shah India Media & Entertainment Lead Advisory Transaction Leader ajay.shah@in.ey.com +91 226 192 0640 Asia-Pacific and Japan Ben Kwan China Media & Entertainment Operational Transaction Services Leader ben.kwan@hk.ey.com +852 2849 9223 Bryan Zekulich Oceania Media & Entertainment Transaction Advisory Support Leader bryan.zekulich@au.ey.com +61 2 9248 5833 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 unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda. 2014 EYGM Limited. All Rights Reserved. EYG no. EA0088 1410-1333305 West ED None 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