Let’s get this update out on a Friday like it is intended.
Most Important Story of the Week – Mergers and Acquisitions in 2018 Update (Finally!)
For some reason, PwC never released their 2018 update for Media and Telecommunications merger & acquisitions update. Or if they did, I never saw it. But PwC did release a first quarter 2019 update and it happens to include the quarterly data for the last two years, so we can update our table from last July! First, the data update, then some insights. (Also, hat tip to Axios’ Sara Fischer who pointed wrote about mergers in her weekly newsletter.)
Before I dig into, the basic headline is above: despite the headlines in June, M&A in media, entertainment and communications was basically flat in 2018 compared to 2017. Yeah, it didn’t seem like it, but it was.
The Data Update
I’ve been looking at three measures for mergers and acquisitions (which PwC calls “deal activity, including some investor activity) which is: total number of deals, total deal value and the number of “mega-deals” or deals valued over $5 billion. Fortunately, PwC has been keeping this data for a few years now, so, for the most part, I’ve been able to figure out the data going back to 2009 in a consistent way.
(I’ve been meaning to write a post with all the links, but search PwC and mergers and you can find regular articles in Variety, The Hollywood Reporter and their website going back a few years.)
The basic trend for M&A is that the deal activity was there, but it wasn’t as big as past years. Total deal value fell from $140 billion or so in 2017 to $122 billion in 2018. Which is still one of the five biggest years for deal activity, but also the lowest in the last five years. Here’s my updated table:
Oh, you don’t like tables? Okay, here’s the total number of deals going back to 2009 in visual form:
Like I said, that looks flat, doesn’t it? That’s why I use three measures and that’s just the first. Here’s the other two, total value and mega-deals:
I like this chart because you can definitely see that M&A has been picking up in terms of mega-deals and total value, but the last two years we’ve been coming back down. Also, the PwC report didn’t include the number of mega-deals in 2018, so I can’t speak to how that number has changed, though my gut says it stayed about the same.
Looking at all this, I’d say that M&A will continue, just on the same path it has been. What is that? Well, my favorite look at M&A has been the rolling five years, and here’s that updated chart which is a pretty good prediction for me for this year (so another 800 or so deals, with say about $120-$175 in total deal value with 15-20 mega-deals, again).
To start, I’ll toot my own horn. I called out last July that the “tsunami of deals” soon to swamp entertainment, media and communications may not ever land. And sure enough it hasn’t . That’s what the numbers clearly show.
My working theory is two fold. Part I is about how even though deals were approved, they haven’t been approved easily. AT&T still had to go to court and fears of deals not getting approved scared of Comcast and AT&T from bidding on Disney’s RSNs. Moreover, a Democratic congress looks to be hungering to take on Big Tech, which may discourage them from doing more deals.
Part II is about uncertainty. There have been rumors of a trade war with China since last year and a few stock market scares. So I think that has scared of some mergers and acquisitions, along with the fear that already bloated balance sheets with debt can’t really absorb more mergers. So unless an Apple or Google or Amazon want to buy something, there aren’t a lot of available buyers. Also, as the table above shows, in a recession all deal-making basically freezes and it takes years to recover.
Other M&A News – Netflix buys Story Bots (kids TV Producers)
As if to prove the point above, the recent deals that I’ve seen again fall into the bucket of smaller deals that are far from needle-movers. Like Netflix buying Story Bots.
Apparently, Netflix has only ever acquired three companies. All I can say is, “respect”. One of my favorite questions in b-school was “build it versus buy it?” My natural leaning is to “build it”, though most people on the finance side tend toward the “buy it”. Netflix appears to really, really insist on the “build it” approach, really only buying a production company for studio space and two other companies for IP. (Though I see the counter that if they had bought a content library, they’d be in a better place content-wise. But with what money?)
Other Contenders for Most Important – Earnings Reports Galore
As I’ve started writing full-time, I’ve found myself paying more attention to earnings reports. The logic is fairly simple: they’re news generating juggernauts. Over the span of a few weeks, we get all sorts of news tidbits dribbled out. While we do get some fun facts, most of the time we don’t learn that much. Most of the coverage regards earnings estimates compared to actual earnings, which is vital for investors, but from a strategic standpoint how does it matter that Wall Street is either good or bad at its job?
Since a lot of the stories rolled out over the last few weeks, I’ll do the quick summary and my quick take on the most important entertainment stories. (I covered Netflix in two articles, here and here.)
The entertainment headline was that Amazon “spent” $1.7 billion on content in Q1 alone, but that’s across video, music and audio, and maybe even comic books. Was it a good spend or a bad spend? We don’t really know. Meanwhile, it’s growth may be slowing in retail, but that’s okay because cloud computing is a huge money maker.
AT&T (and Warner-Media)
The Wall Street Journal Story headline said “customers continue to flee”. That’s usually a bad sign for your business. The DirecTV Now transition is not going well, as a result of ending all promotional pricing. So their down 83K on DirecTV Now and over 544K for DirecTV and U-Verse. But Game of Thrones brought new subscribers to HBO Now, so there’s that!
The headline was that part of the Sony conglomerate made $489 million in profit in their last financial year. So my math is, even with a sky high multiple of 20x profit, that means someone could buy it for $10 billion or so? You can’t afford that, Apple? (Also, I assume the Sony Picture revenue includes TV, but couldn’t find a specific yes or no to that in my, albeit quick, searching.)
Fox Corp (NuFox is my fun name for it) did well last quarter, but the reason it really made it on the list was the ability for Fox to have their COO say, “We’re not planning on direct-to-consumer” while their Fox News brand touts the success of it’s DTC offering. That said, like my praise for Netflix knowing its strategy, that’s what NuFox feels like to me: they are focused on live, news and sports across their brands. In general, I respect a strategy that has that tight laser focus.
The headline is that Q1 was rough for theaters, which isn’t surprising since Captain Marvel didn’t lift all boats the way Black Panther did. The story I’m more curious about, and didn’t really see, though, was if AMC A-List Preferred (their MoviePass analogue) can help lift ticket sales even without blockbusters. My guess is it can’t.
I’ll admit it: I’m rooting for Roku. That’s because it represents the type of innovation we need more of in America. It came up with a plan to allow streaming on TVs, and pioneered the market. Then, two huge tech companies basically copied it (Apple and Amazon) and, under current conservative legal interpretations of antitrust law, well that vertical integration is just fine.
Anyways, they had another strong quarter and if they keep attracting customers I assume they’ll be an acquisition target as the leading “smart TV operating system”, as they announced. We’ll see.
Data of the Week – Entertainment Salaries Galore
The salaries of top media executives became a news story the last few weeks due to some tweets. Um, okay.
That said, it is worth asking if CEO salaries are correlated with success. Really, I’d ask, “What is the Value Over Replacement CEO?” and how that ties to CEO pay. Not that boards of directors ask the question like that, but it’s how I’d ask it. (In a few notable cases, I just do not see it.) For the details, the Variety “Money issue” is definitely worth a read.
TV Biz Models – How Netflix is Paying More Upfront, and How It Impacts TV Producer Backend
Since I’ve been writing about the business of TV, one of the biggest changes has been the shift from selling in multiple windows to just one, digital window. This Hollywood Reporter article by Bryn Ellis Sandburg does a really good job of laying out the pros and cons for talent for Netflix’s move to huge upfront payments. Modeling this move on a content library basis is something I plan to do and in the meantime, my article on “Licensed versus Wholly-Owned versus Co-Productions” helps explain the back end situation.
Pac 12 – More Jon Wilner Insight into Pac 12 Network Struggles
Jon Wilner continues to get incredible scoops on the Pac 12, this time finding the Pac 12 Network income statement specifically, and then this week he used the RSNs sale from Disney to Sinclair to gauge the potential price of all Pac 12 media rights. In short, they are nowhere near the Pac 12’s hoped for $7.5 billion valuation. (Though I do think some of the Fox-turned-Disney RSNs value was mitigated by the lack of willing buyers.)
Star Wars – Only 4 new films between now and 2026
Want to know why it is hard to predict the future? Because it keeps changing!
If you had asked me, I would have thought that between 2019 and 2028, Disney would release at least 6 new Star Wars films. In fact, I wrote that in my series on Disney buying Lucasfilm that 6 films would be the low case. I just believed they would keep making films. Yet, here we are and after Episode IX this December, as of right now, Disney only has three Star Wars films scheduled, which is presumably the new trilogy from the Benioff & Weiss and Rian Johnson team (who are working together, which is also a change from my model).
Obviously, this will further decrease the potential revenue upside from films, though, as I write a lot, this makes sense to keep the quality high for the brand health overall. (And they could always add more dates to the calendar, but this is the most bearish I’ve been on the total number of films.)
Hulu – Another Hulu Subscriber Milestone
Each year in May, at the New Fronts, Hulu dribbles out another piece of data for us. And they did it again, this time letting us know that subscribers are up AGAIN! I really just wanted to use this as an excuse to update some data. So here’s my table from my Decider article a few months back, updated to 2019 (in progress).