As the impact of COVID-19 has torn through daily life, business operations, and financial markets its impact has been felt in the media industry at an immediate commercial and operational level, with potentially long-lasting consequences for business strategy and mergers and acquisitions (M&A). Whilst the particular cause of this crisis was unique it has many features in common with past recessions, and one of these will undoubtedly be to accelerate underlying industry trends that have developed over decades.
The pandemic’s effect on trading has diverged dramatically between business models in media. Whilst many media brands have been negatively impacted some have proven highly resilient, and a few are significant beneficiaries of the thirst for information and entertainment amongst locked-down populations.
Amongst printed media products the greatest disruption has generally been felt by those focused on retail distribution through news trade or free circulation. Print news publishers of scale have seen some of the most dramatic impacts with both national and local newspaper groups responding to the fall in revenues, particularly advertising, with significant cost reductions made either temporarily using the furlough scheme, or in some cases permanently through closures and redundancies.
Publications with direct reader revenue relationships, generally subscriptions, have mainly weathered the crisis well, and we have seen this trend across both digital and print media. Higher levels of usage and engagement have benefited many digital news outlets, with global brands such as The Wall Street Journal seeing all-time high subscriber volumes. As previously reported many magazines have also seen significant new subscription growth during lockdown, and reflecting long-standing consumer preferences this growth has been led by print.
Amongst digital publications with revenue models concentrated on advertising, experiences of the crisis have been mixed. Whilst audience engagement has grown substantially with a 9% increase in total digital media usage, this has however been accompanied by an uncertain advertising market. The latest WARC estimates for 2020 indicate a total ad spend decline of -8.1%, or $50 billion, compared to 2019. Internet advertising is expected to recover in H2 and return to very modest overall growth of +0.6% for the year, however within this certain categories and formats such as digital classifieds have experienced dramatic falls in revenue and are expected to close 2020 materially below 2019.
As the immediate public health crisis begins to ease in developed nations, it is becoming clear that whilst many of these effects are transient, in certain categories they may be permanent. Whilst in recent years the media industry has been fertile ground for M&A, we expect the crisis to materially reduce activity in the short term and to have lasting effects – both negative and positive – on the areas of activity and drivers of value in the media M&A market going forwards.
Uncertainty itself creates significant obstacles to doing deals whilst the operational disruption of COVID-19 remains. As a simple matter of prioritization whilst CEOs are busy dealing with issues in their own business, buying someone else’s business generally becomes a less pressing matter. In order to do a deal, buyer and seller need to reach agreement on terms, and in a situation of disruption this becomes more challenging as the gap in perspectives on risk and uncertainty may grow wider. Even businesses that have benefited from increased usage during lockdown could find this positive impact to be a short term challenge in M&A, as potential acquirers may be skeptical of the long-term value of a boost in revenues that could prove transient.
For these reasons, we expect much M&A activity in the short term to be driven by financial or strategic necessity. More exposed media operators whose finances come under pressure may see acquisition by a larger organization as the best way to weather the storm. At the same time, larger media groups may find strategic divestments useful in managing the crisis, as either a financial tool to raise capital or an operational measure to remove the distraction of non-core or under-performing operations.
Once the immediate financial and operational effects of COVID-19 have passed, the lasting strategic effect on those media groups of scale who have proven resilient through the crisis is likely to be a greater focus on resilience when making acquisitions. Businesses with direct audience relationships, recurring revenues, and products that have performed well through the crisis will have scarcity value, and high-growth subscription brands such as The Information and The Week are likely to become more sought-after as a result.
By contrast, consolidators will be more cautious of acquiring businesses that saw material trading impacts from this real-world test of resilience and as a result we expect to see greater polarisation of the M&A market. In the post-COVID-19 environment, the most resilient media businesses may even command a premium to their pre-crisis valuations, whilst more cyclically exposed business models are likely to be less valuable than they were before.
For large-scale media operators whose businesses have been challenged during the crisis, a more polarised M&A market may present interesting strategic choices. At the same time that their own business comes under financial pressure it is likely to also become less valuable, and the relative cost of acquiring higher-growth assets of scale may also rise. In this ‘squeezed middle’ of significant scale but modest valuation, the options for value-accretive M&A will narrow, and the greatest opportunities to create value for the next phase of the cycle are likely to be organic growth and selective M&A to support product innovation.
Director, Arrowpoint Advisory
Arrowpoint Advisory is the dedicated lower mid-market team of Rothschild & Co in the UK, providing expert M&A, Debt and Special Situations advice to publicly-listed, private and family companies, entrepreneurs, sponsor-backed businesses and management teams, investors and lenders.