1. Media & Entertainment in Today’s Market
By Thomas J Connolly
November 18, 2014
Media & Entertainment is a rich playground – jewels are plentiful, even if in varying concentrated quantities. Like Diamonds and Gold the jewels of M&E are not consumed once and upon consumption gone. They last forever in their appeal to people, regardless of original form or method of distribution.
Like Gold and Gems, they do fall out of favor from time to time – but their consistent attractiveness over time makes them the type of holding we value, even if kept in a vault until demand builds once again, demand that ultimately delivers value that amazes us, both emotionally and financially. Uniqueness found in human brilliance as displayed on a screen or in the lyrics and music of a song, or in the pages of a book, does not fade or disappear. They live on for all generations as a part of our human culture, and the forever value inherent in them should never be underestimated.
This is the backdrop that has proven itself through the years, yet the question of where are we today in that value proposition is top of mind. Are we entering a phase of desire, complacency or boredom? I see desire, and let me tell you why.
The C-Suite executives in the United States have been building their internal portfolios, investing in content, focusing their strategies, divesting of non-critical assets and businesses, and most importantly, delivering returns that seem to fall under the radar. With operating margins that are 10 percentage points higher than the overall market, with valuations based on levered cash flow that are three quarters of the overall market’s LCF multiple, with enterprise values as a multiple of EBITDA that are 10% lower than the market, it does feel as though M&E is a sector that warrants a deeper appreciation of what is in the vault and for what is being created. We have seen some M&A activity of late, bids that reflect consolidation strategies, while other bids have reflected expansion strategies, both geographic and asset portfolio in nature. These seem to be more of toe dipping events in their testing of the waters, with the

2. plunge into the deeper end becoming an increasing likelihood, similar to the pressures of the earth as the plates under our feet shift and the tension builds.
This is an interesting perspective, you may say, but what other substance exists that gives greater credence to the taking of M&A action in the near term vs long into the future? Consider that over the last three years the seven largest M&E companies within the United States, companies with global footprints, have invested approximately $100 billion in their own equities, yet a little over 10% of that $100 billion amount has been invested in cash related acquisitions of businesses, acquisitions that expand the reach and portfolio of this group of seven. Couple that $100 billion return to shareholders with over $50 billion in internal asset building through Cap-Ex and program development, all in an environment where debt has grown, but at a rate that is a fraction of the amount invested. Cash flows from operations are rich, investments have been prudent and strategic, and leverage used to expand the businesses is below the overall market rate of debt to EBITDA. These facts indicate M&E has a strong foundation, a foundation that provides capacity to expand and grow, and if desired to increase leverage. These attributes make the industry very attractive today, and this invites expansion paths to be high on the C-Suite agenda, along with defensive considerations should hostile unwanted interests emerge. Interests that may come from within the M&E industry, from Tech, from Telecom or through Financial buyers.
The current state is gleaming, as gold and jewels often do, but what about tomorrow, what about that future state?
With consumer consumption patterns changing, delivery options expanding, competitive needs for quality content, for unique content, for scarce content, for content that scales across the globe, in forms that exhibit an array of choices such as mobile, short form, branded content, long form, 3D, 4K, OTT, SVOD, PPV, Freemium, etc., the value for tomorrow is one of global reach. Competitive distributors will hunger for exclusives, for advantages in getting and holding consumers, and within this the value in the vault and the value of creative skills, of story-telling, story crafting, and bringing to life human emotion through the myriad of ways that content may touch us is one that in the current environment seems rich with promise. Like precious coveted holdings, beauty is in the eyes of the beholder, often rising and falling in fits and starts, but over time M&E is an enduring value proposition and today its value is as great as it has ever been.