M&A Commentary : Media is the M&A message

The frenetic pace of M&A from 1999 looks to have taken its toll, despite a quarter packed with more mega-mergers, European merger activity is down by 26 per cent on this time last year. By the end of Q1 last year, M&A involving an European target reached $314 billion, yet this year’s figures comes to $265 billion (based on figures to March 20).

In March, headline deals occurred in the red-hot banking, oil and telecoms sectors. These account for 55 per cent of European activity by value with deals such as Deutsche/Dresdner and BP Amoco/Burmah Castrol skewing the data.

Yet the theme emerging this quarter is that movement in the media industries cannot be ignored. Ever since AOL-TimeWarner was announced, the buzz word around European media circles has been content provider’. To be fair, this phrase adds little to the debate about old’ and new’ media, but nevertheless has forced all relevant content and distribution players to define their strategies. For some – such as Yahoo! – content acquisitions are definitely not on the agenda, while the time-worn strategic alliance is once again back in fashion. But for the most part, we can expect a string of content and distribution couplings of varying size and quality in the coming months.

But what’s in all this for the venture capitalist? Obviously the main attraction at buyout stage is the divestment opportunities set to unfold as content players achieve focus in order to maximise their attraction to Europe’s all-conquering mobile phone giants and ISPs. Meanwhile, with mobile phones now clean favourites in the race for the most attractive platform, many non-GSM compatible web hosts are becoming less sure-footed by the week.

With this in mind, it may not surprise that the other sectors up there with banking, oil and telecoms, are print-publishing and the European film industry. The UK media sector has been particularly active in the first quarter, particularly for Aim-listed companies. Back in February, acquisitive consumer publisher Highbury House Communications announced a GBP39 million ($63 million) reverse takeover of Nexus Media. The deal was funded by an 11-for-20 rights issue and completed on 20 March, giving Highbury more than 100 titles – including related websites and an events arm. Nexus too has been growing at a phenomenal pace since its inception in 1993. The deal is good news for Legal & General Ventures and Bank of Scotland, who have stayed with it post-flotation. L&G will maintain a 4 per cent stake in the enlarged group, which has a market cap of GBP142 million ($227 million) after acquiring five small add-ons in the past year. Moreover, the deal is an example of how print media companies are continuing to buy brands which are ready to roll out on self-financing websites or via third party arrangements.

The UK newspaper industry is feeling the combination of new and old pressures as it attempts to find its feet in the new economy. One of the more interesting deals is the acquisition of Denitz Media by Southnews. Southnews won the battle for Denitz, which was formed in a 3i-led management buy-in last August, against competition from two larger trade buyers. The original MBI was worth GBP75 million, with a concurrent deal being stuck with Northcliffe Newspapers Group which bought the companies comprising the Midlands businesses for GBP44.5 million. Given that Southnews has paid just GBP57 million, 3i is looking at a very healthy profit in much less than a year. 3i also owns a stake in Southnews.

Aside from pure media plays, the ISP race for content is also providing a flurry of activity across Europe. German media group Bertelsmann is leading the charge, having sold its half of a joint venture with AOL Europe to AOL. Bertelsmann – armed with a $7 billion war chest – is now sizing up web content companies. And Gameplay.com, the Aim-listed online games retailer, has moved into the German market with the DM150 million ($77 million) takeover of Nuremburg-based Computec media. The rationale is refreshingly simple – Germany and the UK account for 40 per cent of the computer games market – and Gameplay.com is already established in the UK.

The deal was funded with one-third cash and two-thirds stock, and follows Gameplay’s acquisition of Joysoft in Germany in January. Gameplay has also been busy forming a joint venture called Shout TV, set up to develop interactive digital TV channels. Once again, alliances rather than acquisitions are proving to be the structure of choice when attempting to create distribution platforms, while takeovers are being reserved for content plays.

Double Deutsche could lead Frankfurt equity surge

European banking is never quiet, and the advent of a genuine pan-European financial market continues to drive mergers across the continent. Deutsche’s 60/40 merger of equals’ with Dresdner finally got underway last month only around five years after analysts first identified the two as potential partners. For venture capitalists, this deal could be the one that finally gives access to blue chip divestments. The duo have a clutch of industrial stakes to divest which will lead to more liquidity in Frankfurt and we can expect the likes of KKR to be milling around looking for a couple of big German deals as a direct trickledown. Elsewhere, the deal has put immense pressure on Commerzbank to seek a partner. Commerzbank’s European alliances with Italian insurer Generali, Spain’s BSCH Credit Lyonnais, Italy’s Banca Intesa, and Austria’s Erste Bank.

But there appears to be little breathing space for Commerzbank. At time of going to press, market speculation has surrounded a story that the UK’s HSBC is preparing a hostile bid for Commerzbank, while analysts are hoping for ABN Amro to break into Germany by merging with Commerzbank.

But aside from retail-driven banking mergers, investment bankers are set to have their deal flow augmented by e-banking acquisitions. Europe’s top banks have already set the ball rolling, with BSCH taking 75 percent of Internet brokerage Patagon.com in the US for $529 million. Meanwhile, arch rival BBV Argentaria has hooked up with Spanish ISP Terra Networks to buy First-e, the Dublin-based internet bank, for $270 million. BBV and Terra Networks are merging First-e, which has 50,000 customers, with the BBV’s existing online bank Uno-e to form Unofirst in a deal worth E2.4 billion. Interestingly, Unofirst has venture capital backing from Apax Partners, Capital Z, PaineWebber Capital, Vertex and Morgan Stanley Dean Witter. The plan is for an IPO by September, with Morgan Stanley – still basking from the oversubscribed debut of Lastminute.com – favourite to get the mandate.