Ever since it became clear that the Communications Act would be a liberalising reform of UK media ownership regulation, there has been a change in the behaviour of investors.
They have built a premium into share prices to reflect the anticipated heightened level of mergers and acquisitions (M&As).
The driving force was going to be new investors from Europe and the US, who would be allowed access to UK media assets that was previously denied.
Although the Act has had implications for most consumerfacing media sub-sectors, the valuation uplifts were felt principally in TV and radio. This is where, it was thought, the most powerful overseas buyers would be focused, where the biggest consolidation benefits would be enjoyed and where the highest barriers to change had previously applied. This optimism appeared to be supported by the favourable terms on which Carlton and Granada were allowed to merge.
It has now been some time since the legislation came into force and there has been precious little activity. The likes of Clear Channel, RTL and Viacom have yet to make any moves. If anything, their statements have been muted. Without overseas intervention, domestic broadcasters have been waiting for someone else to make the first move. With the exception of Emap’s acquisition of SMG’s 29% stake in SRH, however, nothing significant has happened.
Investors might well ask why this is the case, whether it is likely to persist and, if so, whether the market’s M&A premium on broadcasters is justified. The reasons why overseas investors have failed to take advantage of their new opportunities are not entirely clear, but might include a perception that UK broadcasting valuations are too high, a perception that there are more and better opportunities in the US or continental Europe and a lack of perceived synergy from horizontal, trans-national acquisitions.
A strong rebound in the advertising market could change perceptions. Having started the year with a strong, positive consensus on the prospects for advertising, sentiment appears to have deteriorated again.
Without a lead from overseas, what the domestic participants in the ownership reshuffle do is being determined by what they think others will do. For instance, an acquisition of SMG by an Ulster TV/SRH consortium might make some sense, but not if Emap decides it wants to lead consolidation in radio, or if ITV decides it does not need to buy up the Scottish and Northern Irish franchises.
What is the media investor to make of all this? The main force in the market remains the anticipation of a recovery in advertising. Should this expectation wane, the issue of industry consolidation might become more prominent.
If it does, and no significant development has occurred, investors might reasonably downgrade media valuations, not only for lower sales and profit expectations, but also to reduce the M&A premiums.
Nick Martin, is director of media investment at HgCapital