UK media: On the road to recovery?

Private equity investments in the UK media sector took a sharp fall in 2008 with only 20 deals recorded by unquote"- down from a record 37 transactions in 2007. The overall value of these investments also dropped considerably from £4.7bn to £1.4bn; this figure is however misleading given that 2007 saw the £3.2bn buyout of music publisher EMI by Terra Firma. In 2009 investment in the sector slipped further with only 12 deals worth a meagre £187m.

However, the picture started to improve in 2010, with unquote" recording 15 investments worth £193m. The first notable transaction came in April with Better Capital acquiring the UK business of Reader's Digest out of administration for £13m. The investment was carried out via Better Capital's £142.2m AIM-listed BECAP fund, while investment bank Seymour Pierce led the sales process, which is said to have attracted around 100 parties.

In May, Terra Firma injected around £105m into EMI as the company struggled to fight against breaching bank covenants. In October, Lyceum Capital paid £17m for a majority stake in Compact Media Group, an independent rights administrator for television, film and music, while on the publishing front, Matrix Private Equity backed the £4m MBO of B2B publisher Faversham House Group in November.

Private equity investments may be on the mend, but the media sector is far from being a risk-free proposition for dealdoers - tellingly, both EMI and Reader's Digest UK were still in a precarious situation last year. Furthermore, Broadcasting and entertainment businesses have yet to find the best way to adapt to an increasingly digital environment. Traditional press and publishing operators face the same challenge, but are also struggling to generate sufficient advertising revenues.

Amidst these concerns, the past year however saw signs of improvement for the UK media market. According to research carried out by the Centre for Economics and Business Research, UK advertising began growing again in 2010, albeit at a modest rate of 0.8%. Marginally stronger growth is projected for 2011, driven by continued growth in online advertising and increased activity in more traditional channels.

Furthermore, the media sector fared better in the UK than in the rest of Europe at attracting private equity investments last year. While dealflow was up in the British Isles, it fell to 45 deals worth €1.14bn on the continent as a whole - down from 50 deals worth €3.6bn in 2009. "The UK media market has always been rather vibrant; I can see other countries, including the US, wanting to tap into it going forward" notes Douglas McWilliams, CEO of the Centre for Economics and Business Research. UK music publisher Chrysalis could be a case in point, as it was acquired in November by KKR-backed BMG for £107m.

According to industry observers, appetite and valuations are set to increase for certain types of media businesses: digital, mobile, data-driven and B2B operators all display strengths favoured by investors in the current climate. "We've seen a real appetite for B2B businesses throughout the crisis, and I don't see that phenomenon dying down soon" says Marcus Allchurch, a TMT specialist at BDO Corporate Finance.

Despite these encouraging signs, media companies still operate in a difficult environment. The sector may be back in private equity's sights, but growing fears of a slow-moving economy in 2011 could have investors thinking twice before pulling the trigger.

 

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