Deal Market: Smaller Buys, More to Come

Deal values and volumes were up again in the second quarter, fueled by AT&T’s May agreement to acquire satellite-TV stalwart DirecTV, which should add to the momentum leading into the second half of the year, according to a report by PricewaterhouseCoopers.

The AT&T-DirecTV deal, valued at about $48 billion (not including assumed debt) made up the bulk of the $74 billion in deal value for the quarter, according to PwC. That kept up the pace of the previous quarter’s $75 billion in deal value, dominated by Comcast’s agreement to acquire Time Warner Cable for about $46 billion in stock (also not including assumed debt).


According to PwC, there were five “megadeals” (deals valued at $1 billion or more) in the second quarter, up from four in the first quarter. The nine megadeals in the first half of the year were 50% ahead of the six megadeals in the same period in 2013, according to PwC.

Aside from AT&T-DirecTV, the quarter also included Comcast and TWC’s agreement to divest about 3 million customers through a series of sales and swaps with Charter Communications valued at $9.4 billion, and Level 3 Communications’s agreement to acquire TW Telecom, worth $7.3 billion.

While the first half of the year was characterized by megadeals, PwC noted there was “vigorous subsector activity” in the quarter — including several smaller telecom, advertising and publishing deals. That should help fuel a healthy second half of 2014.

In its report — U.S. Entertainment, Media & Communications Deal Insights — PWC said it expects the entertainment and media deal pipeline to be strong in the second half.

“While the industry has experienced its share of large, transformational transactions, several recent investments have been smaller in scale and pointed at emerging technologies,” PwC said in the report. “EMC industry trends continue to drive increased competition among legacy and emerging companies and their competitors, and PwC sees more traditional companies in the industry continuing to seek M&A opportunities in more nontraditional spaces, such as early- stage, high-growth technology companies.”


Already several deals have been announced in the third quarter that back up PwC’s optimism, including a handful of media companies — Tribune, Gannett and E.W. Scripps — that announced this month plans to separate their respective newspaper and publishing operations from their broadcast TV-station businesses. Several analysts have speculated that those separations could lead to a second wave of consolidation in the sector.

PwC partner, Entertainment, Media & Communications Deals and one of the authors of the report, Bart Spiegel, said in an interview that the momentum is expected to continue across sectors.

“There is no reason to think otherwise,” Spiegel said. “There is nothing out there in the market that is indicating a slowdown in Q3 and Q4. We’re not seeing a lot of pressure on the capital markets.

“We’re also seeing large players in the market that are still active,” he added. “They’re trying to find their position on that digital value chain and secure themselves for the immediate future and where they see things coming out in the long term. You’re also seeing relatively new players active as well. Everyone is jockeying for position.”

One deal that would have put the sector over the top in the quarter — 21st Century Fox’s $80 billion bid for Time Warner Inc. — didn’t happen, but it still managed to shine a spotlight on the potential for consolidation in the programming sector.

Fox withdrew its bid on Aug. 5 and said it was not looking for “alternatives” to a Time Warner acquisition. While that has put at least a temporary damper on deal activity, many analysts believe there is room for consolidation in the industry.


Even Fox could re-enter the fray at a smaller scale. Sanford Bernstein media analyst Todd Juenger recently noted that although Fox has committed to spend about $6 billion buying back its own shares, it will have a significant amount of cash on hand for deals.

Although PwC won’t comment on specific companies, Spiegel said there has been a flurry of activity in the content sector on both the programming and production side. He said he expects it to continue.

“There is a lot of value ascribed to content and as a result, you are seeing a lot of activity as it relates to those companies that create content and have the proven ability to replicate successes around that content,” Spiegel said.

Morgan Stanley media analyst Ben Swinburne said he expects Liberty to participate in consolidation either directly through its Liberty Broadband spinoff — slated to be completed by year-end, which will include is Charter interest, a small position in Time Warner Cable and its holdings in satellite location company True Position — or by increasing its Charter stake.

“As the scale in programming buying and technology development increases in importance for all cable operators, we expect continued consolidation particularly among smaller operators,” Swinburne wrote in a recent note to clients.


According to PwC, deal volume in the second quarter was 218, nearly even with the 222 deals done in the first quarter and a full 4% above the 210 deals done in the second quarter of 2013. Advertising and marketing led the way with 53 deals, followed by Publishing (42 deals); Internet/Information Services (40 deals) and Communications (20 deals).

Cable placed ninth in terms of the number of transactions (five), or half of the 10 deals reported in the first quarter. But cable far outpaced other sectors in terms of deal value — $57.7 billion in the second quarter (compared to $46.7 billion in the first quarter), well ahead of second place Communications, with $8.7 billion.