M&A activity in Europe’s media sector is predicted to rise this year, driven by deregulation and continued corporate restructuring. Professional publishing will continue to attract private equity interest, while following a dramatic improvement in market sentiment about advertising revenue-sensitive areas, newspapers and TV and radio broadcasting look set to become new buyout hotspots. Joanna Hickey reports.
2003 was one of the busiest years on record for leveraged buyouts in Europe’s media sector, which spans educational, directories, newspaper and business-to-business publishing, cinema, radio and TV broadcasting, market research and advertising and marketing service providers. According to Standard & Poor’s Leveraged Commentary & Data, European media leveraged loan volumes rocketed to €4.72bn in 2003, from €1.08bn in 2002 and €1.86bn in 2001.
The media highlight of the year was the €5.65bn purchase of Italian yellow pages publisher Seat Pagine Gialle by BC Partners, CVC, Investitori Associati and Permira, a deal that made history as Europe’s largest ever leveraged buyout. Other high profile 2003 transactions include Candover and Cinven’s €1.05bn LBO of Bertelsmann’s science and business media publisher Springer, Saban Capital’s €1.3bn+ buyout of German broadcaster ProSieben from insolvent KirchMedia and the $3.8bn sale of Vivendi Universal Entertainment to General Electric’s NBC.
2003’s sharp increase in activity was driven in part by European corporates’ restructuring campaigns. In their quest to become globally competitive and reduce the mountains of debt incurred in their late 1990s spending sprees, media companies such as Vivendi have boosted financial sponsors’ deal supply by divesting non-core assets. In addition, many areas of the media sector are extremely attractive to private equity houses. “Media companies usually make great leveraged buyouts, as they can combine very strong cash flows with real organic growth. They are also very leverageable,” said Peter Combe, head of financial sponsors at Lehman Brothers.
The major media buyout firms, such as Advent International, Candover, Cinven, Hicks Muse Tate & Furst, Warburg Pincus and 3i, have therefore taken full advantage of both the increased supply and the lack of bidding competition from strategic buyers.
Advertising back in vogue
The telephone directories space has seen the greatest number of LBOs in recent years, with Seat in Europe and the landmark $7.05bn buyout of QwestDex in the US in 2002 ranking among the world’s most prominent buyouts ever. With a glut of directories deals already completed, also including Yell and Telenor Media in 2001, TeleMedia in 2002 and Verizon’s directories in 2003, only a handful more are still available to buy in Europe. France Telecom is mooted to be selling Wanadoo’s Pages Jaunes, VSS and 3i’s three separate units could be combined for potential resale and VNU’s directories could also attract bids.
But while yellow pages buyout opportunities are dwindling, other areas of the media space are gearing up for a burst of M&A activity this year. Advertising-revenue sensitive areas, such as newspapers, consumer magazines, outdoor advertising and TV and radio broadcasting, now look set to become major buyout hotspots.
Apart from rare exceptions such as the current bidding war for The Telegraph and speculation that Pearson could sell the FT Group, buyout firms have avoided this most cyclical sub-sector of the media for years. However, all this is set to change. There has been a major shift in investor perception of the discretionary advertising industry in recent months. Media financial sponsors say the advertising industry is on the brink of a turnaround and that now is the time to buy broadcasting, consumer and newspaper assets, when the earnings cycle is still depressed and prices are comparatively low.
In broadcasting, following Advent’s purchases of Dutch radio station Radio 538 in December and Hungarian radio station Danubius in May 2003 and Permira’s February 2004 buyout of German pay-TV operator Premiere, indicate further deals are on the way. “In Europe, radio and TV assets are becoming an increasing focus of private equity interest, especially in Central and Eastern Europe,” says Geoffrey Austin, managing director media at Deutsche Bank.
In newspaper and consumer publishing, meanwhile, PCM, one of The Netherlands’ largest national newspapers, is currently the subject of a £450m+ private equity bidding war mooted to include Candover. This is deemed to be just the tip of the iceberg for newspaper buyouts, although most activity is expected to take place in Continental Europe, rather than the UK. “The UK’s newspaper market is quite mature. However, Europe is much more fragmented. Countries like Germany have very disjointed regional newspaper landscapes. Private equity houses are looking at Continental Europe for newspaper investment opportunities,” says Fred Wakeman, director at Advent International.
The UK radio and TV broadcasting market could also prove a disappointment in terms of leveraged buyout opportunities. Although recent regulatory changes are set to stimulate M&A activity, some experts say that, with the exception of a few headline deals (see boxed article), most acquisitions will involve strategic corporate buyers. There are a number of obstacles that will deter financial sponsors from snapping up UK radio and TV assets. Although there are plenty of radio stations, there are only a handful of major players: Capital Radio, Emap, GWR, Scottish Media Group, Scottish Radio Holdings and Chrysalis, and only a few firms, such as Virgin, would make suitable LBO targets. For example, as Capital Radio is public, sponsors would have to pay a significant premium to take it private.
More importantly, financial sponsor interest could be dampened by high and rising UK broadcasting prices. Prices have increased in anticipation of M&A activity, following both the regulatory changes and the growing confidence in advertising. “In the UK, the threshold of audience restrictions that prevented, for example, two London radio stations combining, have been lifted now and so some expect UK radio consolidation this year. But in anticipation of this and of the UK TV broadcasting regulatory changes, prices have already risen. Many now trade on multiples of 15x EBITDA, so in the UK this area is less attractive to private equity houses,” says Wakeman.
Thus, in the UK, the broadcasting buying universe could mostly be limited to US media and other strategic buyers. “Radio asset prices can be high due to licence costs, and cash flows are not always that strong, so it can be a hard sector for private equity firms to invest in,” says Olivier Wolf, partner at PricewaterhouseCoopers corporate finance.
In other areas of the media, professional publishing continues to draw private equity interest. “Following VSS’s sale of Centaur, Cinven/Apax’s sale of Approvia to United Business Media and the ongoing bidding for Le Moniteur in France, we expect more business-to-business publishing M&A deals. These will involve both trade and private equity bidders,” says Wolf.
Professional publishing spans a variety of areas. The most attractive area for financial sponsors is the scientific, technical and medical (STM) category, which includes companies like Kluwer. STMs are deemed the most stable in terms of revenue, due to their predictable annual subscriptions-based revenues. Academic journals and educational publishers such as Houghton Mifflin and 3i’s Malmberg follow STMs in terms of cash flow stability and buyout desirability. “Private equity always figures strongly in any non-advertising sensitive publishing assets sale such as STM or educational publishing, as cash flows in this sector are both stable and growing. And, as top line growth is often unexciting, trade buyers can be less interested, leaving the field open for the financial sponsors,” Austin of Deutsche Bank.
The last category of professional publishing is business-to-business, such as Aprovia, and market research and financial data information providers. Although business-to-business can be viewed as a less stable area of professional publishing, as it is often more dependent on advertising revenues, it is still highly sought after by private equity houses. Several business-to-business deals have already emerged this year and more are expected. In March, Taylor & Francis announced a £1.1bn merger with business information provider Informa, while the forthcoming €500m to €600m sale of educational publisher Editis by Lagardere is attracting financial sponsor interest. Speculation is also mounting that, following the sale of its academic publishers to Candover and Cinven in 2002, Wolters Kluwer could now sell its educational publishing assets.
Sponsors are also looking at cash flow stable market research and service providers and information providers such as Mori, which is currently being bought out by private equity firm ISIS Private Equity. “Apart from three or four very large companies like VNU’s AC Nielsen or Taylor Nelson Soffres, there are many much smaller players in the market research and financial data fields in Europe that will provide buyout opportunities,” says Wakeman, of Advents International.
A flurry of UK cinema deals is in the offing; United Cinemas International has been put up for sale by Vivendi and Viacom (Paramount Pictures) for £400m+. Rumoured bidders include Robert Tchenguiz, Terra Firma, private equity-owned Vue/Warner Village, HgCapital, the Reuben Brothers and JP Morgan Capital, which owns Cine UK.
In the next few years, the UK cinema industry could emerge with just a couple of big chains. Cine UK and Odeon could also pass to other sponsors this year, with part owner Tchenguiz looking set to buy WestLB’s stake in Odeon. Meanwhile, Vivendi is still mooted as likely to sell its 58% stake in UGC Cinemas, following rumours last year that CDC and LBO France were interested buyers.
Lastly, following Advent’s investment in UK PR firm Financial Dynamics and Electra’s purchase of German advertising and marketing firm Scholz & Friends last year, further LBO activity is expected in the advertising services and marketing services sector of media. Buyouts in this sector can be the hardest to complete, though, as it is deemed the most cyclical area of media. “Advertising services and marketing services are the most cyclical areas of the media sector. It is far harder to do leveraged buyouts for a company where the main assets are people,” says Stephen Eichenberger, co-head of European leveraged finance at JP Morgan.
For some, the fact that corporates are starting to make acquisitions once again means buyouts in the media sector could fall. Strategic buyers can easily outbid financial sponsors due to the post-acquisition synergies and cost savings they can derive. “In the last few years, there have been a lot of LBOs in the media sector, as the trade buyers have not been on the pitch; 57% of the value of media acquisitions in 2003 were private equity led. But now the trade buyers are back, there could be less LBOs,” says Olivier Wolf.
Given that media M&A activity overall is set to increase this year, a good number of deals will still fall to financial sponsors. Although last year’s volumes may not be exceeded, the number of deals is predicted to increase as broader sub-sectors such as newspapers and broadcasting are coming into play. “2003 was a very exceptional year for European media buyouts and it is hard to see deals of the size of Seat and Springer
being repeated again this year. But while volumes may plateau, the overall number of deals could rise,” says Wakeman. The buyout market therefore remains bullish about the flow of investment opportunities. “Given the expected overall increase in media M&A activity this year, media LBOs will still be a major theme,” says Wolf.
For a sector emerging from recession, the predictability of most media firms’ earnings and growth projections is hard to gauge. “Apart from stable areas like directories, it is very difficult to predict what will happen with the earnings of most media companies, as it is dependent on GDP growth and advertising,” says Wakeman.
Despite this, most bankers remain enthusiastic about lending to media, partially because of the extremely high liquidity currently prevalent in Europe’s leveraged loan, mezzanine and high yield bond markets, following the supply-demand imbalance of investment opportunities in 2003. “Although, in many ways, the sector is emerging from recession, banks remain keen to support most media buyouts,” says Combe of Lehman Brothers.
However, debt financings for the more advertising-reliant sectors will need to be conservatively structured. “Lenders will differentiate heavily between say, a yellow pages publisher or a circulation-driven trade titles publisher like Springer, which have demonstrated huge stability historically, and say, a national newspaper, where 70% of revenues may come from much more cyclical advertising,” says Combe.
As with all buyouts, in addition to revenue provenance and cash flow stability, the level of capital expenditure will be closely scrutinised by lenders. “The level of capex is also critical. For a media firm with stable revenues and low capex, 6.5x total debt to EBITDA may be saleable, while 5x may be toppy for a cyclical firm with high capex,” says Combe.
Although deals will, as usual, be judged on a case-by-case basis, on the whole, if the structure is right, financing support for media LBOs is still anticipated. “It is very hard to generalise about predictability of earnings as it is different for every company. It depends on the fixed cost base; the higher it is the more volatile cash flows will be if there’s a downtick in advertising spending. But in principal, most banks are still happy to support buyouts in this sector at the right leverage,” says Eichenberger of JP Morgan’s .
Regulatory changes set to boost UK broadcasting acquisitions
December 2003’s Communications Act lifted restrictions on foreign ownership of UK TV and radio broadcasting companies. Media specialists are predicting this could open the floodgates to acquisitions in the sector by US and other media companies.
The Act also changed the rules governing newspaper and cross-media ownership, permitting major newspaper groups to buy TV stations such as Channel 5 for the first time. Previously, newspaper owners such as Murdoch, which control over 20% of the national press, were not allowed to own over 20% of a commercial TV station. The rules restricting the merger of ITV companies were also lifted, facilitating the merger between Granada and Carlton, as were the rules preventing the holding of more than one national radio licence.
Newspaper owners still have to get broadcasting acquisitions approved as being in the public’s interest by new media watchdog Ofcom and the Secretary of State and the OFT will still monitor monopoly issues. However, experts expect consolidation in the sector as a result of the Act. “Following the UK TV sector regulatory changes, we expect to see more M&A activity in the industry,” says Wolf of PricewaterhouseCoopers’.
Although the general consensus is that most M&A activity will concern corporate to corporate acquisitions, a few leveraged buyouts are expected. Private equity houses have already made investments in a number of independent UK TV production companies; LDC invested in Mersey Television in 2002, and, in 2003, Bridgepoint invested in Chrysalis TV, Kleinwort Capital bought into Hat-Trick and Beringea invested in Zenith. Rumours now suggest private equity houses are swirling RDF Media.
In UK radio, potential targets include Scottish Media’s Virgin Radio, while speculation abounds that Emap, which bought Scottish Radio Holdings (SRH) recently, could now receive bids for SRH or indeed could itself become a target. Emap’s former radio boss Tim Schoonmaker, who left the company in January, is tipped to be in talks with private equity firms regarding a bid for a UK radio company.