If content is king, who rules?

Paul Harris

Paul Harris

Principal, Advisory, Financial Due Diligence, KPMG LLP

+1 212-872-4494

Scott Purdy

Scott Purdy

National Media Industry Leader, KPMG US

+1 212-954-4207

In Q2’21, there were two major content transactions—AT&T’s sale of its WarnerMedia assets to Discovery and Amazon’s $8 billion deal to acquire MGM Studios. These deals continue a long search for content sparked by surging demand for streaming services during the pandemic lockdown. We believe they could spark additional large-scale M&A to take other storied assets off the chessboard.

In the battle for content, it now looks like tech platforms (Amazon and Netflix) and media giants (Disney, Warner Bros. Discovery) may be ahead of the rest of the pack. Meanwhile, both telecom players (AT&T, Verizon) and cable operators have backed away from content to focus on their core communications businesses. NBC Universal-Comcast is the last giant to remain committed to content—an anomaly that some investors would like to eliminate.

A synergy boom?

The ultimate aim for some media giants is to build a streaming business that spans the globe. Netflix and Disney are trying, but this is very expensive, requiring localized shows tailored for national markets in addition to the tent-pole blockbuster films and English-language hits that travel well. That requires careful planning and impeccable execution.

The stakes are climbing with each additional M&A announcement, and the market seems to expect ever-greater synergies. The targets are getting larger as companies now have more experience in integration and a precedent to surpass investor expectations. Buyers are realizing synergies by simplifying organizational structures, streamlining combined back offices and implementing new technology and systems for greater efficiencies.

The synergy boom will now face its biggest test in the Discovery-Warner deal. Discovery has announced plans to trim operating costs by $3 billion post-merger. It is highly motivated to do so, given the $55 billion in debt that the combined company will carry.*

Outlook for the rest of 2021

The competition for content is not over and is not restricted to streaming media. In Q2’21, for example, game giant Electronic Arts completed its $2.4 billion acquisition of Glu Mobile, a game publisher.

To win deals in this environment, there will be a premium on creative diligence—by uncovering new sources of value that ordinary diligence would overlook. Buyers will also need to identify many types of synergies to make these deals work. Mergers will have to be very carefully organized if they are to capture the value rapidly enough to expand market share while strengthening acquirer balance sheets.

Bigger deals, higher multiples, larger synergies

Deal Date Synergy target Realized
Discovery/Scripps March 6, 2018 $350 million $1 billion
Viacom/CBS Aug 13, 2019 $500 million $1 billion
Disney/Fox Mar 20, 2019 $2 billion -
Discovery/Warner May 17, 2021 $3 billion -
Source: Media reports, KPMG analysis



* Source: Kate Duffy, The merger of WarnerMedia and Discovery has at least $3 billion in 'cost synergies,' a phrase that often means layoffs, Business Insider, May 17, 2021