Two thirds (64 %) of Private Equity (PE) investors expect to see activity levels increase in the UK media sector over the next 12 months, according to research from leading financial and business advisors Grant Thornton UK LLP.

The report Where is the smart money going in media?*, which canvasses the views of leading private equity investors backing UK media companies, reveals a high level of optimism over expectations of overall private equity activity in the UK media sector. Only 10% expect PE activity levels to fall over the next 12 months while 23% expect levels to remain the same.

Mirroring the positive sentiment, the majority of PE respondents (90%) plan to make further investments in the UK media sector during the next 12 months. In terms of deal size, over half (54%) expect to witness the bulk of PE deals taking place in the £16m – £100m deal size range over the next 12 months. 33% expect the majority of deals to be less than £15m and 10% between £101m – £250m.

Dominic Bolton, Media Corporate Finance Partner at Grant Thornton said: “M&A activity in the UK’s Media sector declined sharply during the recession, with deal values down 75% in 2009 but, reflecting the trends in the wider market, the first three quarters of 2010 have seen a much stronger appetite for deal-making.

“Activity in the private equity community mirrored the overall sector during the downturn, with a 41% decline in deal volume during 2009 with only 10 deals taking place, and a 78% decline in value to £118m. 2010 has seen an increased level of activity, with 12 deals announced by the end of quarter three with an aggregate value of £322m.”

According to the survey, 88% of respondents ranked the transition to online – including paid-for content and new delivery mechanisms – as the most significant key growth areas for UK Media. Consequently, companies in the digital niche are expected to receive the most investor interest, with 87% of respondents believing PE will most aggressively target businesses operating in this sector.

The respondents are also expecting the digital space to be the most competitive for acquiring assets, as it is believed many corporate buyers will be looking to buy in the know-how they need for their digital strategy through M&A.

Bolton explained: “Given the tumultuous impact of digitalisation on the Media sector, and the subsequent increase in demand from clients for marketing services that this has created, it is not surprising that the digital sub-sector is leading the M&A activity. As a case in point, seven of WPP’s nine transactions so far this year have been companies providing digital services.

“It has become apparent in deals both rumoured and officially announced, that good quality digital assets in strategically important sub-sectors such as legal and regulatory information, are able to attract near bull-market valuations, particularly from corporates.”

Reflective of today’s relatively lower valuations and improving credit markets, 52% of respondents see acquisitions as the key activity driver for the next 12 months.

“The recession not only curtailed the scale of acquisitions, prohibiting the large, highly-leveraged deals of 2005-2007, but it also reduced company valuations. With little access to cheap debt, private equity participants were not able to structure large-scale deals, and nor was there a rush to exit portfolio holdings given lowered asset valuations. But with the wider economic growth, expectations are now robust for a more active next 12 month period,” Bolton explained

87% of respondents expect the lower end of the market (below£100m) to witness most private equity activity. Almost a quarter of respondents based their position on the opinion that ‘the mid-market offers the best growth opportunities’ and the fact that many cash-rich mid-market funds are now out there looking for deals.

Bolton said: “Since 2005, 71% of private equity-related deals have been in the £5m-£100m range, while over the past 18 months this ratio has increased to 90%. The wider economic issues have certainly played their part in this trend, as has the reality that the UK media sector is a fragmented industry, but it is also in part due to the sector’s structural issues; companies in the digital arena tend to be a smaller size.

“The longer-term, structural issues are the significant drivers of corporate finance activity today. Strategic investments are being made by corporates and, to a lesser extent private equity, to counter and also embrace the opportunities and threats posed by digitalisation and globalisation. The financial strength and strategic imperative of the larger corporate buyers should provide private equity with a robust list of exit opportunities. And the reopening of the credit market is beginning to provide private equity with some of the leverage that they require to structure larger-scale acquisitions,” Bolton concluded.

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