In late 2023 and early 2024, some analysts were predicting an upsurge in media M&A as a result of declining interest rates and the pent-up demand following years of a slow market. A variety of factors have conspired to depress this optimism. The Federal Reserve has been slow to decrease interest rates, which handicaps debt funding across all sectors. The Federal Communications Commission has adopted a much more restrictive posture in terms of allowing consolidation in broadcasting, including not just Standard General’s proposed and now terminated $8.6 acquisition of TEGNA, but also smaller deals that might change the ownership concentration in individual markets. On top of all that, industry economic pressures continue to be intense, particularly in the migration of traditional linear media to streaming platforms and the continued fragmentation of the market.
Most of the press coverage has focused on rumored mega-deals at the largest companies. These include a possible sale by Disney (market capitalization $166 billion) of its linear assets, including the ABC television network to a television operator like Nexstar ($6.5 billion) or Allen Media (private). And speculation continues about whether Paramount Global (market cap $9.7 billion), might merge with Warner Bros. Discovery ($29 billion) or others. Paramount has been struggling with the headwinds described above and cut its dividend by 80% to $0.05 in 2023. But the focus on mega-deals misses the story. There has been an underlying current of smaller transactions that has helped companies to improve their financial health and become more agile technologically.
In this environment, we will continue to see a sluggish market in terms of traditional horizonal integration M&A, in which companies expand their portfolios of television, radio, cable, and programming assets, but there will be occasional significant tactical transactions as media companies execute targeted acquisitions and divestitures, largely in technology and content, that will help them to operate more effectively.
Greg Guy, Founder of Tideline Partners, a firm specializing in the brokerage of media properties, summarizes current conditions as follows:
The overall broadcast M&A market outlook for 2024 remains on the weaker side. While there are certainly transactions to be done, the buyer pool remains active but very shallow. With the television ownership limits remaining in place, the larger consolidators have little capacity to make significant transactions.
Indeed, according to S&P Global, television acquisition volume fell by over 85% in 2022 and another 40% in 2023 to a paltry $375 million, a far cry from the $5 billion plus volumes that were routine in the 2010-2020 period. In both radio and television, transactions year-to-date in 2024 have moved very slowly, with most acquisitions involving low-power or minor stations valued at less than $1 million.
Headwinds like these are not healthy, either for individual companies or the industry. They impede innovation and economic rationalization. Indeed, M&A helps companies economize their operations and generate efficiencies. To a degree, a suffocated M&A market handicaps the media and entertainment sector -- and even society as a whole – because M&A accelerates the corporate transformations that are so critical in a competitive and rapidly changing environment.
But there are reasons to be optimistic. First of all, most broadcasters, despite increased competition and high interest rates, are still quite profitable. Radio companies still enjoy EBITDA (earnings before interest, taxes, depreciation, and amortization), averaging 15%. Pure-play television companies are in the 30% profitability range. Owners have the breathing room facilitated by strong cash flows until business transaction volume recovers. According to Bob Heymann, Managing Director of the Chicago Office of Media Services Group, “a gap in expectations is what is causing so few deals getting done” because prospective sellers can sit tight until the caution held by buyers comes into line with the actual performance of the businesses.
Moreover, there is more vibrancy in other sectors that broadcasters can employ to become stronger. For example, notes Heymann, the market for cell/broadcast towers remains extremely strong. The activity in this sector raises another critical point: mergers and acquisitions are not just about mergers and acquisitions; they are also about divestitures. Media companies can raise capital and simplify their operations by divesting non-core and more liquid assets. Financially distressed Audacy, for example, has been taking advantage of the strong market identified by Heymann to sell tower assets to raise cash, the most recent of which being the up to $21 million that Audacy will receive for the WEEI tower site in Boston and other real estate. Audacy also recently sold approximately $414 million of its debt to Soros Fund Management in a deal that now makes Soros Audacy’s largest shareholder. Similarly, iHeartMedia announced in November of 2023 that it would receive $100 million in proceeds from the sale of its equity interest in music licensing company BMI. The Canadian broadcaster Bell Media diversified its revenue base by acquiring the Canadian billboards of New York-based OUTFRONT Media for approximately $300 million.
Will we soon see a return to annual broadcasting M&A in the $8-$10 billion range? That is unlikely, but we can certainly expect in the near term to see more targeted transactions as companies strengthen their operations with diversification-related acquisitions and strengthen their balance sheets with divestitures of non-critical liquid assets. The light has not turned green yet, but nor is it red. Media companies are, as is appropriate in such an unsettled environment, stopping at the blinking yellow, looking both ways, and proceeding with the smaller, more targeted acquisitions or divestitures that make sense.
This article was written by John Sanders, a Principal with Bond & Pecaro, Inc., a consulting firm specializing in valuations and related financial services to the media industry.
Posted at MediaVillage through the Thought Leadership self-publishing platform.
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