Merger Mania Sweeps the Studios

As Prices Rise, More Deals For Reality Expected This Year
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With cable, satellite and online pay TV distributors hungry for more and more content, programmers are scrambling to snap up the producers of drama, comedy and reality shows in an effort to gain scale and tap into new revenue streams.

In the last 18 months alone, more than a dozen production houses have been sold for almost $2 billion, and all signs point to more deals being done.

British programmer ITV has been the most aggressive on the acquisitions front, snapping up eight different production houses in the past 18 months for more than $500 million.

Included in its buying spree was $360 million for an 80% interest in Leftfield Entertainment, producers of reality hits Pawn Stars for History and The Real Housewives of New Jersey for Bravo. The deal values Leftfield at about 12 times 2013 cash flow of $38 million, a high price compared to past deals. ITV can buy the rest of Leftfield for another $400 million over the next five years, provided the producer more than triples its cash flow to $130 million or greater in year four of the agreement.

ITV officials declined to comment for this story, but the company has had a clear strategy of boosting its production capabilities — in 2010, the U.K. broadcaster mapped out a five-year transformation plan, including building a strong international content business by boosting production holdings on both sides of the Atlantic.

But as more and more companies enter the fray, prices have risen. That means a substantial payday for producers of hit reality shows and increasing risk on the part of the buyers.

While it’s still early days for many of these acquisitions — most were made within the last six months — as prices continue to soar, it could become more difficult to realize a reasonable return on investment.

FremantleMedia North America CEO Thom Beers, who has been on both sides of the negotiating table as head of Original Productions, producer of Ice Road Truckers, Deadliest Catch and other reality hits, said consolidation is being driven by heightened competitive pressures and a need by producers to tap into a deeper pocketed partner. Beers sold a 75% interest in Original Productions to FremantleMedia in 2009.

“Everybody is really pressed to grow both the top line and the bottom line,” Beers said. “Competition is getting tougher. Acquisition is a much easier and quicker route to do that.”

Beers added that it’s no accident that reality producers have been the target of buyers — they are less expensive and much more nimble and able to juggle more shows than their scripted counterparts.

“One thing reality producers can do is acquire scale really quickly if they’re good,” Beers added. “I can’t buy a studio. That’s the difference between scripted and reality — scripted showrunners can only work on a couple of shows at a time, where we [reality producers] can reach scale quickly.”

Regarding complaints by some executives that prices are rising too fast, Beers has a oneword answer: Tough.

“I’ve sold and I’ve bought companies and it’s a sad thing to me when I hear that a network executive gets upset when somebody sold their company at a 10 times multiple, when that network executive is probably making $5 [million] to $7 million and is complaining that somebody else got rich. To me, that’s the Great American Way.”

Beers was less worried about networks wanting to own their own shows — he said that reality show producers have little leverage with networks unless they have a show that multiple channels want. What makes him nervous is how larger media networks have entered the fray — like Fox with its partnership with reality producers Endemol and Shine and Discovery Communications’ and Liberty Global’s joint buy of All- 3Media.

“That’s a little scary,” Beers said. “All of a sudden, do you start to worry that that pipeline, that doorway, that portal gets a little smaller because you’ve got somebody sitting right in front of it ready to develop any program they want to make? … It’ s all about distribution and when you don’t control distribution, yeah, that’s a worry.”

Reality producers aren’t the only targets. U.S. cable networks have been on a mission to rely less on licensing shows they air and focus on owning them. So far, most have focused on scripted fare.

AMC Networks CEO Josh Sapan, at a recent industry conference said that while some of the programmer’s biggest hits have been shows it has licensed from other studios — like Breaking Bad from Sony Pictures Television and Mad Men from Lionsgate Television — his preference is for the networks to own as much of the content they air as possible.

“We prefer when we make TV shows to have an ownership position in them so that we can enjoy the economic benefit of them being consumed, outside of our base cable-channel business,” Sapan said at the Sanford Bernstein Strategic Decisions conference in May.

The type of show often determines how much the network invests, Sapan continued. For example, the programmer’s AMC has scored well on scripted dramas, while its other networks, like WE tv, are heavily skewed toward less-expensive reality shows.

“The calibration of expenditure and return is significantly determined by the type of material that you’re investing in,” Sapan said. “It is a constant calibration and recalibration that evaluates what the revenue opportunities are, where one is competitive and what the return looks like.”

Networks and production companies have different reasons and motivations behind their acquisitions strategies, Pivotal Research Group media analyst Brian Wieser said.

“Discovery’s intentions may differ from ITV’s,” Wieser said. “Discovery is more about providing capital efficiencies and potential ways to provide hedges against cost increases and giving them leverage in negotiations.”

While ITV has been the most aggressive, international reality content king Discovery Communications has made the biggest deal so far. In May, Discovery teamed up with international distribution giant Liberty Global in a joint venture to purchase U.K. production house All3Media for $930 million. As part of that deal, Liberty and Discovery will share a 50% interest in the producer of reality programming like Undercover Boss and Ramsay’s Kitchen Nightmares. In addition, both parties will have access to All3Media’s extensive programming library — currently 8,000 hours strong and growing.

According to Discovery and Liberty Global, the deal represents a multiple of about 8.5 times cash flow, at the high-end of recent U.S. deals.

Still, pricing is relative, according to the analysts who follow the sector.

“Clearly, it illustrates the importance of the ownership of content and particularly of ‘formats’ that are replicable in different geographies,” RBC Capital Markets media analyst David Bank said. “Financing is very cheap right now. Content is king. Those two realities are going to drive consolidation in the content space.”

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