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After weeks of whispers that AT&T might want to buy a major media company, the October 22 news that AT&T has offered to buy Time Warner in a proposed transaction valued at over $100 billion including debt was the latest signal that the 2016 lull in media deals could be coming to an end.
Traditional media M&A in 2016 has been relatively quiet versus prior years, with many sectors either going through transformational or absorption periods, but the pace is likely to increase in 2017. With all the recent buzz surrounding the potential sale of Twitter, Netflix and other digital properties, it’s clear that major media & telecom companies such as Disney, Google, Apple and AT&T are looking to continue to transform and grow their businesses. Deals in 2016 such as Disney-BAMTech, Verizon-Yahoo and Univision-Gawker have set the pace and show media players’ interest in upping their digital presence and capabilities.
While we await the next transformational deal, here’s a 2016 summary for some key media sectors:
Until the AT&T-Time Warner deal news, cable network M&A volume has been tepid, with Crown Media Holdings’ go-private transaction (valuing it at $2 billion) and Sinclair Broadcasting’s $350 million acquisition of the Tennis Channel two of the watershed deals of 2016. The question now is whether the proposed Time Warner deal will re-ignite M&A activity in the space. Investors are clearly concerned about whether the deal will pass regulatory muster, as well as what Time Warner's willingness to sell might mean about the sector in general.
While there may be willing sellers, the question is who would emerge as a major buyer in the cable network space, now that AT&T has thrown its chips in with Time Warner. Certainly, 21st Century Fox has been mentioned as a potential acquirer. Cable network owners have been discussing shutting down networks more than acquiring them. While content remains critical, the actual network business model has been more called into question given cord-cutting and cord-shaving trends, as well as the growth of networks delivered directly to consumers, such as HBO Now.
Much of the economic future of cable nets lies in the hands of Nielsen, which is expected to come out with Total Content Ratings next March. Although cord cutting, cord shaving and cord-nevers are real, a more significant issue is that viewers are shifting to online/mobile without being counted.
Due to the FCC’s current blackout on TV station trading for companies participating in the Spectrum Incentive auction, the only significant TV transactions in 2016 have been station spinoffs following the $4.6 billion Nexstar/Media General merger in early 2016. However, the spectrum auction, should it conclude successfully, will reshape the TV station sector, including the deal market.
2017 is anticipated to be very busy for TV station M&A, especially with expectations declining for the number of stations that will be taken at auction. The strength of the retransmission consent revenue stream has supported TV station values, and even though political revenues have not delivered on their full promise, receipts should still approach $3 billion in 2016.
The deal market for radio stations in 2015-2016 has been very quiet, hampered by leverage issues at some of the nation’s largest broadcasters, Cumulus and iHeartMedia. Financing for deals with less than $5 million in cash flow is difficult to secure. Aside from the Beasley/Greater Media merger, there have not been any radio transactions of more than $10 million in 2016. Deal volumes are expected to remain low throughout the rest of the year.
Cash flow multiples have lately hovered at 6.0x to 6.5x (for mostly smaller properties) and are not likely to change soon, leading some sellers to opt to wait for better days before parting with their stations. CBS Radio, which could have been a major deal, looks headed for an IPO instead.
Cable system deal activity in 2016 has taken a breather after the major deals of 2015. Volume from deals announced in 2015 reached a record $114.44 billion, or more than the previous 13 years combined. Four transactions — Charter's deals with Time Warner Cable and Bright House Networks and the acquisitions of Cablevision and Suddenlink by Altice NV — accounted for 99.8% of the dollar volume. AT&T’s $67 billion acquisition of DIRECTV, announced in May 2014, closed in mid-2015.Cable sales by system size from 2006 through 2016 YTD show average cash flow multiples hovering around the 8.5x mark for systems with more than 100,000 subs. The Charter/Time Warner Cable, Altice/Suddenlink and Altice/Cablevision deals were all struck at forward cash flow multiples over 9x.
The large deals of 2015 significantly reduced the pool of potential midsize M&A targets, all but ensuring a fall in activity and volume in 2016.