Restructuring and an increasing role for private equity
The European media industry is restructuring to respond to the threats and opportunities posed by new technologies and shifts in demographics and tastes.
Some media conglomerates are shedding non-core businesses to focus on their main markets. Other businesses are consolidating via mergers into more powerful national or
pan-European players.
Heightened merger activity “Most European businesses may be shying away from mergers and acquisitions, but media stands out as a sector where deal volumes are recovering and confidence is growing,” says
Inaki Echare, Investment Director, 3i. The number of media M&A transactions in Europe is expected to exceed 110 in 2005, up from 85 in 2003, according to PricewaterhouseCoopers.
Inaki Echave, Investment Directos, 3i
Most activity is currently concentrated in the UK media market, where deal values rose to Û8bn in 2004 from Û3bn in 2003. But the same pressures driving industry restructuring in the UK – in particular the impact of new technology on traditional media companies – are likely to drive the need for renewed consolidation among media entities across Europe.
Media M&A activity since 2001 has mainly been prompted by media conglomerates selling non-core assets following the downturn in the telecoms and dot-com industries. British Telecom’s Yell directories service, France Telecom’s Pages Jaunes and Italy’s Seat Pagine Gialle have all changed hands in recent years for this reason. Restructuring was also behind Dutch publisher VNU’s 2004 sale of its yellow pages business to a consortium of private equity investors led by Apax Partners, and behind Germany’s
Deutsche Telekom’s disposal of its cable subsidiary, Kabel Deutschland, also to Apax Partners. Another example is the Û3bn sale of Vivendi Universal Entertainment to General Electric in 2003, following Vivendi’s collapse under the weight of accumulated debt.
Restructuring has allowed a number of strong European businesses to emerge. The last few years has seen mergers between mid-sized businesses in different countries giving greater weight in financial markets and economies of scale. The formation of Yellow Brick Road is one such story. 3i and its private equity partner created YBR Group as a holding company for three telephone directories businesses with operations in eight different countries.
Another example is Bertelsmann’s sale of its science and trade publishing arm Bertelsmann-Springer to private equity firms Cinven and Candover for Û1.1bn. In January 2003, the new owners merged this business with Kluwer Academic Publishing, the Dutch scientific publisher. The enlarged Springer Group will be second only to Reed Elsevier in the world scientific publishing market.
Source: PWC Media Insight, 2004
International opportunities
Most of Europe’s media businesses have kept a domestic focus, but some of the bigger names have expanded internationally in search of new markets. BSkyB, for example, has invested in Sky Italia, an Italian satellite TV broadcasting business. Silvio Berlusconi’s Mediaset empire in Italy acquired half of Spain’s Telecinco TV.
German publisher Axel Springer has moved into Austria and Eastern Europe, launching a newspaper in Poland in 2004. And Sweden-based Metro newspapers, which started nine years ago with a free-circulation sheet in Stockholm, has mushroomed into an international empire encompassing 38 editions in 15 languages.
The opportunities for cross-border expansion – either via mergers with existing businesses or by establishing new ones – are greatest in the sectors that are least culturally bound. Directories businesses and professional, scientific and technical journals are most readily combined across borders because of similarities in advertiser and reader
bases. But this, too, is beginning to change. UK magazine publisher Emap has acquired titles in France and merged the businesses with its UK publishing business according to readers’ interest profiles – those interested in cars or in the environment, for example – rather than their nationality.
As we’ve seen, France’s Lagardere Group has made a small industry out of licensing its popular brand names in foreign markets. Its magazine Elle has proven a winner in markets as diverse as Russia, China, Japan, and Poland. Lagardere licenses the brand to local publishers, and if the launch is successful it buys out the local partner, in some
cases including an entire group of local newspapers or magazines in the deal.
Crevan O'Grady, Head of Media, 3i
Private equity’s place in the market Private equity played a role in nearly a third of all European media M&A deals in 2004 (see Chart 3), accounting for nearly half of total deal value, according to PricewaterhouseCoopers. Private equity’s predominance in M&A deals is partly a result of a lack of trade buyers, which have concentrated instead on repairing their damaged balance sheets following the dot-com crash of 2001. But even with the gradual return of trade buyers to the media space, private equity firms are
likely to remain highly active. They will build on their sector expertise, track record and expansive contacts networks to attract investors and target companies.
“Why is private equity a natural stimulant for the media sector? Simple. To turn high potential into high reward you need to combine creativity and talent with a rigorous business model, financial firepower and international business partners with a track record of success in the sector,” says O’Grady.
The role of private equity
Private equity firms have already played an important role in restructuring media companies and repositioning them to face new challenges. They have provided funding at a time when trade investors have been reluctant to make new investments. “Private equity investors are fluid and inventive in their ability to manage capital investments of various kinds,” says David Elstein, Chairman of Sparrowhawk Media.
Source: Initative Europe Deal Analysis Tool
“There is also a lot of money flowing into private equity funds, whereas trade investors tend to have only their own equity paper or bank cash, and therefore have less ability to get involved in transactions at a time when stock markets are anxious about returns on investment.”
Private equity investments take various forms, from providing seed money to fledgling ventures – the venture capital end of the business – to providing growth capital, in the form of equity and/or loan stakes, to businesses that are already well into the revenue-generating stage and need assistance to grow. Private equity firms also finance buy-outs for businesses looking to spin out of a larger company or for company owners and/or founders seeking to cash in some or all of their equity stake.
Traditionally, major private equity media deals have been focused on buyouts of information companies. But private equity firms are getting more comfortable with areas such as entertainment. As a result, growth capital deals in the sector will become more common.
David Elstein, Chairmanm, Sparrowhawk Media
There are good reasons to expect private equity firms to be even more active in Europe in the future. “The proliferation of media channels will lead to increased competition for audiences, and therefore greater pressure for consolidation and restructuring among traditional media organisations,” says Xavier de Prevoisin, Investment Director, 3i. “But the trend for European media firms to adopt subscription- based models is also highly attractive to private equity players, as this tends to deliver a more stable, predictable cash flow than advertising.
Risk and reward
Unlike bank lenders and trade buyers, private equity firms tend to be more willing to take a bet on future growth rather than relying on trading history. “Banks tend to lend on the basis of a company’s debtors, its stocks, and its cash flow, whereas private equity lends based on expectations of growth, not past performance. We have a different
attitude to risk and reward that enables us to create opportunities for growth,” says David Noble, Media Advisor, 3i.
Private equity firms are also more willing than trade investors to rely heavily on debt in the cash-generative businesses often seen in the media sector. Apax Partners and Cinven were reportedly able to assemble a debt package of eight times ebitda for the purchase of Dutch publisher VNU’s telephone directories business.
High levels of debt affect the way in which private equity firms manage their investments. “A high degree of leverage increases the risk, which also makes the acquired company more focused,” said Fred Wakeman, Head of the European Media Practice of Advent International in London. “Private equity firms are more accustomed to dealing with leverage on the balance sheet, while corporates tend to be more conservative. That makes private equity firms more suited to an acquisition strategy.”
David Noble, Media Advisor, 3i
The strong reliance on debt also tends to shorten private equity investors’ time horizon. They tend to take on additional financial and business risks when there is a prospect of a short-term payout – generally in the range of five to seven years.
The exit strategy – selling the business at a profit, either through a public flotation, a leveraged buyout or a sale to third party – must be fairly clear to private equity investors at the time of original investment. But even here, private equity can sometimes take a longer-term view. Media companies sometimes turn to private equity investors for the kind of patient capital they previously hoped to find elsewhere.
Adding value
Private equity firms don’t just bring capital to the table. They can also bring additional value through their focus on shareholder value. Private equity has an impressive record of improving the performance of media businesses partly because it is able to motivate and support management to deliver growth. “What is really happening with private equity is that they incentivise the management to do a great job, and as a result businesses have been quickly improved,” says Olivier Wolf.
The most successful private equity firms are also increasingly offering experienced media advisers and useful international connections. They are no longer staffed mainly by people with a background in accountancy – many have now recruited advisors with a long track-record in running media businesses. As competition for the most attractive media deals continues to increase, the trend for private equity firms to develop highly specialised media expertise is likely to grow.
Wherever possible, private equity firms seek to introduce media acquisitions to other firms, in similar or complementary businesses. Often, experienced board members are introduced too. In the case of Pinewood, for example, 3i introduced Chairman Michael Grade and an experienced Non-Executive Director. “It’s an example of how a private equity firm with a strong network of media contacts can open doors”, says David Noble, Media Advisor, 3i.
The power of disruptive technology
In addition to major deals in print, broadcast and online services, private equity firms are investing in smaller companies that enhance the content or delivery of mainstream players. “Media companies are essentially in permanent upgrade mode,” says Ian Lobley, Director of Venture Capital, 3i. “Newspaper publishers, broadcasters and mobile phone and internet service providers are all looking for new distribution technologies to enhance their offering.”
Often it can be a simple idea that provides the basis for new innovations. For example, 3i recently sold UK-based company Trigenix to Qualcomm. Trigenix’s product enables users to personalise their mobile phone screen by choosing a logo relating to a newly released film. “Companies in such niches will eventually take off in the marketplace, because they support and extend the offer of traditional print and broadcast media,” says Lobley.
Another 3i-backed company, California-based Bitfone, offers a similar example. Bitfone has developed a technology that analyses the software and firmware in a mobile phone over the air. This means that when an application is performing poorly or when there are software defects, mobile operators can determine where the problem lies.
Bitfone’s secure data pipe also allows a firmware update to be sent to the handset over the air to fix the problem, or even add new media functions to the phone or PDA.
“Mobile phone service providers are interested in this type of technology, because it dramatically improves their ability to deliver reliable rich-content services to mobile devices,” says Lobley.
The future
The next five years will see no let-up in the pace of change for media companies. New technology and changes in consumer demand will continue to redefine Europe’s media landscape, challenging traditional players and producing new markets in the process. The trends of personalisation, portability and convergence have the potential to unleash a new wave of innovative media products. Today’s media companies must reposition themselves so they can harness technology, penetrate new markets and cater to fast-changing and increasingly niche European audiences.
Cravan O'Grady, Head of Media, 3i
Change on this scale will inevitably bring another wave of industry restructuring and consolidation. M&A activity is likely to continue its strong growth in the UK and pick up in mainland Europe. At the forefront of these transactions, private equity will continue to act as a catalyst for growth, renewal and innovation.
Private equity firms have already built an impressive presence in the media industry in recent years, capitalising on opportunities left open when trade buyers ran into difficulties in the early 2000’s. In the process, they have influenced the way other buyers approach potential media mergers and acquisitions. They have focused on unlocking the value in under-managed businesses and reoriented them to exploit new markets. With private equity firms now clinching some of the largest media sector deals, we can expect the industry to play an increasingly important role in helping European media adapt to the challenges of the digital age.