Media moguls on the prowl

First the good news. Media deals are tipped to keep flowing in 2008 following a record year for sector M&As in the UK and steady activity in Continental Europe.

It would be more of a surprise if they did not. There is always a disproportionate amount of M&A activity in media, which is valued for its cash generation, the amount of cash that it turns into profit, and if truth be told, for its sheer glamour. Now, after a few years of riding high, valuations, or at least those of quoted companies, have fallen back to near their long-run averages.

The bad news is that with debt harder and costlier to come by, and despite bulging coffers, private equity’s ability to compete with cash-rich trade buyers for any mega deals is diminished.

Instead, industry analysts expect low and mid-market private equity players to carry the torch for private equity in 2008, at least by deal volume.

Some private equity houses have reached the same conclusion. “I think it’s going to be quite quiet this year on the media front,” says Simon Leefe, a managing director at Candover, which is focused on deals of €500m to €5bn, and looks to commit between €150m and €500m to each transaction.

For one thing, says Leefe, “prices are probably higher in vendors’ than buyers’ expectations”. Also, larger media conglomerates, such as Reed, and Pearson, have seen little change in top management for a number of years.

“So I don’t think there’ll be a huge amount of M&A activity until one of those two things changes: perhaps a new CEO, perhaps some recovery in pricing,” reckons Leefe.

Candover had a foretaste of how the environment had changed when it went some way down the track to look at Emap’s business-to-business (B2B) brands, but walked away before the assets were eventually sold to a joint €1.7bn offer from Apax Partners and Guardian Media Group.

It is a frustrating time for large private equity funds with strong media experience. There are clearly grapes to be picked, judging by recent news flow and by the latest Media Insights report from the authoritative PricewaterhouseCoopers (PwC) corporate finance team.

Stories have linked private equity variously with supposed bids in the offing for ITV, the UK broadcaster, and for Setanta, the Irish TV company that broadcasts UK premier league football and which counts London-based Balderton Capital and Doughty Hanson among its shareholders. But in both cases, trade buyers were tipped to win any contest.

An unnamed private equity group was competing to land Spanish newspapers and magazines group Zeta for a price said to be around €700m in a contest moving towards a climax as EVCJ went to press. But up to six trade buyers were also involved and seen as the most likely purchasers.

3i pulled off a €36.4m deal in January, picking up 40% of independent Spanish audiovisual producer Boomerang TV, which specialises in the creation of new entertainment and fiction for television. Boomerang plans acquisitions and greater penetration of its content into digital television.

Indeed, PwC expects European media M&A activity to hold up in 2008 after a strong first half of 2007 gave way to a weaker second one.

UK deal completions rose 9% to 75, but total value soared, largely due to Thomson Corporation’s €13.5bn takeover of Reuters. Deal volumes on mainland Europe were level at 103, but value dipped.

Total media deals in the UK and mainland Europe increased 3% to 178 compared with 173 in 2006 and flirted with 2000’s peak of 186. The combined value of European deals rocketed 16% to €50bn, only just below the €52bn concluded in 2000.

But fewer mega deals were in evidence, particularly in the second half of the year as the credit crunch began to bite, although deal pricing was generally more conservative, PwC found.

And analysis of private equity involvement shows it losing ground. PwC reported that deal activity by unquoted equity players in European media edged down to 2007, following a record 2006. Deal volumes were back at 2003 levels with 24 completions compared with 35 in 2006.

And the total value fell from €19bn in 2006 to €12.5bn, albeit €7.7bn of the 2006 tally came from 3i’s purchase of VNU, the online and print leader in the Dutch recruitment advertising market. Private equity’s share of this value was 25% compared with 44% in 2006 and 36% in 2005.

Mega private equity deals were concentrated in the UK: Terra Firma’s €3.1bn buyout of EMI; and the €1.7bn disposal of Emap’s B2B interests to Apax/GMG. KKR/Permira’s €3.3bn merger of Germany’s largest commercial television broadcaster, ProSiebenSat.1, with SBS of Holland and Scandinavia to form a pan-European broadcaster was a notable continental exception.

Olivier Wolf, media sector leader at PwC corporate finance, said private equity would have to adapt to new conditions. He suggested one response would be to hold assets longer, and offset the negative impact on returns through more ambitious ‘buy-and-build’ programmes to drive further value creation. This would generate numerous infill acquisitions.

While big deals may be hard to bring down, mid-market private equity players hope sales of non-core, or underperforming, businesses could improve deal flow as trade buyers who bolted on acquisitions at top dollar at the height of the media boom waken to reality.

“I think some big media deals will have to be restructured,” says Jeffrey D Montgomery, managing partner at GMT Communications Partners, the London-based specialist in TMT investments of up to €500m, but with a sweet spot of between €100m to €250m.

“Because of the way debt was raised, there’s no immediate knife to the throat. But some larger media conglomerates are going to recognise that and accelerate asset sales. I think that’ll be a feature of 2008.”

He also speculates that this will mark the nadir of valuations for newspaper publishers in the UK, although he sees “more pain to come” in Continental Europe, where traditional media are more fragmented.

GMT is keeping a watch on those UK regional newspaper publishers which are dominant players online. Total revenues have been in decline as online advertising has taken business from print classified adverts without making up the shortfall. GMT expects the decline to stabilise, and hopes to spot a gap between valuations bottoming out and others becoming aware of revived growth prospects.

“The opportunity from our standpoint would be to find that discontinuity in value, buy some of those, and once the rest of the larger publishing companies also recognise that, and fix their own internal problems, they’ll be back to internal consolidation,” says Montgomery in an echo of Olivier Wolf’s ‘buy-and-build’ advice.

Montgomery is also bullish and acquisitive towards outdoor or out-of-home advertising, which, given the fragmentation of traditional media and online, is one of the last remaining mass market media.

Outdoor has useful characteristics for private equity. It is monopoly-like: local concessions for giant billboards can be long-term and exclusive. High traffic areas command high rates from advertisers. Large billboards tend to be directional – for example, hamburger chain McDonalds does not get traffic unless it advertises – so contracts are usually renewed.

Such factors also give it some defensive characteristics in a downturn, as underlined by recent robust figures from JCDecaux, the number one outdoor company in Europe and the UK.

Speaking before reports that GMT was believed to be looking to realise its 85% stake in Redext Imagen Exterior, a leading Spanish outdoor group, Montogomery said: “We would be on the lookout for more out-of-home media in general, whether traditional, in-store Point-of-Sale (PoS), a whole variety of things”.

GMT has held the Redext stake since 2005, and a sale later this year would be towards the front end of its usual investment horizon of three to five years.

The area is seeing significant activity in 2007 and 2008. Last year, GMT purchased Primesight, the UK outdoor advertiser, from SMG, the troubled, Glasgow-based media group, for €86m.

Small to mid-market player Argos Soditic (Paris, Geneva, Milan) acquired PoS advertising company Marie Laure PLV, in a BIMBO which allows Marie Laure to become a key player in a fragmented market and to develop throughout its home market, France, and Europe, into new sectors and alongside existing customers in the luxury goods, cosmetics, automobile and other spaces.

Compagnie Nationale à Portefeuille (Belgium) took a 25.3% stake in Affichage Holding, a Geneva-based, out-of-home advertising company operating in Switzerland and in Central and South-Eastern Europe. JCDecaux is also an investor in Affichage.

Broadcasting and publishing still dominate European media M&As by deal value, although the market is more evenly split in terms of volume, PwC found.

Publishing increased its share of the market as a whole to claim 67% by value (2006: 62%) and 47% by volume (2006:42%).

Broadcasting share fell slightly to 29% of value (2006:32%) and 29% by volume (2006:37%).

Buoyed by sales of digital agencies, marketing services’ share of deal volume rose to 24% (2006: 21%), but total value was down to 4% (2006: 7%).

The truly big change in 2007 was the rise of the digital deal. Even applying a conservative definition of ‘digital’, says PwC, 21% of European media M&A activity had ‘a digital component’ last year, and the value of the top 10 digital deals doubled from €1.2bn to €2.4bn.

Doing ‘digital’ does not need to be rocket science. Andrew Hartley, managing partner at August Equity, says sales of DVD and downloadable PDF versions of portfolio company Imagine Publishing’s consumer technology titles – such as Photoshop, PC Gaming, and Digital Camera – are proving a popular way of getting a good additional return on proprietary content.

“Compilations of magazines, where you can get 50 in one, with in-depth search, is a very good business for us and great value for users at £20 a time.”

The problem is that many traditional media companies with a rich legacy of content and rights at their disposal are still trying to work out how to grab a bigger slice of online advertising and how to monetise digital content. “They have got it wrong more often than right online,” says Crevan O’Grady, head of media at 3i Group, whose digital investments include Sulake, a Finnish company whose Habbo Hotel website is an online interactive community for youngsters.

But even Microsoft and its target, Yahoo!, have struggled to compete online against the power of Google’s search and advertising technology.

Social networking sites such as Habbo are being widely hailed as the future of online advertising: advertise or sell stuff to people while they are hanging around interacting with each other. Yet web analytics firm comScore reports that the average time spent by users of the top three – My Space, Facebook and Bebo- is in steady decline.

So if interactivity alone is not the key to holding attention long enough, what is?

One answer may be the model being pushed by 3i-backed company Demand Media, a ‘next-generation’ web media company led by Richard Rosenblatt, the former CEO and founder of MySpace.

US-based Demand uses its own proprietary social media tools and distribution platform to connect up content creators and large audiences with advertisers through its network of vertical media web properties.

Shorn of the gobbledygook, this means websites such as and, where people spend a long time sharing their interests with others. It is also aimed squarely at web users who are growing old with the medium and will use it to further their interests and hobbies.

The latest buzz surrounds the potential for pushing adverts at players of online games while they compete with each other. It has figured on the radar of serious players, but is as yet in its gestation phase.

“Gaming would be entirely new to us and we need to work at it,” said Crevan O’Grady at 3i.

As the more technically minded wrestle with online business models, others are looking further afield for new media opportunities – see page 24.

PricewaterhouseCoopers observes that Central and Eastern Europe – particularly Poland, Hungary, the Czech Republic and the former Soviet bloc – are beginning to offer opportunities for Western-style M&A, as is Turkey.

But while TMT has been a very buoyant space in Central Europe for the past 15 years, the big wave is over, warns Thierry Baudon, managing partner at Mid Europa Partners, one of the most active private equity players in the region.

Until recently, TMT accounted for two thirds or more of Mid Europa’s investments. But suitable deals have slowed over the past 18 month or so, and Baudon laughs as he offers advice to wannabes.

“Well they’d better rush, because it’s pretty much over. They can come and scout, but they won’t find much that’s not yet been done or is in the process of being done. So they should not pin their hopes on being able to do a lot in our region.”