Economy Seen Driving More Modest Communications M&A in 2023

Brokers and analysts expect broadcast M&A in 2023 to remain slow, but the possibility of a recession makes the future somewhat hazy, they said. “Personally, I’m not expecting a surge of deals,” said BIA analyst Nicole Ovadia. An economic downturn would likely make it harder for broadcasters looking to buy stations to secure financing, she said. However, it could also spur some broadcasters to exit the business, which could lead to spin-offs, Ovadia said.

TMT deal volume and value were down this year, but they were largely in line with pre-pandemic trends, said Lisa Fontenot of Baker & McKenzie. However, the types of deals and way they're being done are being affected by the slower economy, the question of pending recession, inflation and substantially higher interest rates, she said. All of that's driving down CEO confidence from where it was, for example, 18 months ago, she said. She said M&A activity will pick up as interest rates stabilize.

Regulatory hurdles are also a more-pronounced hurdle to transactions, Fontenot said. She said there's increased antitrust review of deals that goes beyond the traditional impact on competition. Foreign direct investment reviews also are becoming more pronounced, she said.

Rising interest rates are making it more difficult to get funding for deals now, but the deal market should rebound when interest rates stabilize, said Mark Gibson, KPMG TMT national sector leader. He said numerous private equity and venture capital firms have tech-related funds and money to deploy but are sitting on the sidelines waiting for valuations to come down. Once that happens, he said, "they are going to be back in the game big time."

Continuing inflation and interest rate hikes will likely affect the pace of future deals, as inflation affects company pricing while higher interest rates make it tougher to borrow, said PwC M&A adviser Lori Bistis. Facing those economic challenges, plus ongoing supply chain constraints, companies -- particularly tech firms -- are focusing more on rationalizing and right-sizing internal operations, she said. That could lead to some divestitures as companies focus on core competencies, and the availability of those assets could lead to deal activity, she said.

The tech sector was particularly active in M&A in late 2020 through mid-2022, and Big Tech still has ample cash on hand that could help in doing transactions in coming months given interest rates, Bistis said. But for now, tech and private equity, which also has a lot of cash available, seem to be holding off, waiting for valuations to come down as inflation comes under control and as assets start being divested, she said.

The tech sector generally has been reluctant to make divestitures but now is being forced more to look at that option, Bistis said. She said the lack of divestiture seems to reflect in part tech culture and the complexity of untangling an asset when tech business units are so interdependent.

KPMG's Gibson said Big Tech has the financial wherewithal to make deals, but emerging tech companies need deal markets to be open and the pace of deals involving them will be slower for at least the first half of 2023. He said cable ISPs could see some consolidation, though valuations have to stabilize.

Telcos were active in 2022 in deals that had one divesting assets that another telco would snap up, as they look to optimize their service networks and bundle products, Bistis said. That trend should continue into next year, she said.

Media has had so much consolidation there's a lack of notable desirable assets, particularly with the regulatory attention such a deal would face, Bistis said. She said smaller deals involving content acquisition and sports or gaming are probable.

There could be pressure for some streaming service consolidation, Gibson said. He said he expects numerous deals in the sports sector involving the convergence of betting and tech's role in the in-stadium experience.

At the beginning of the pandemic lockdown, several deals were paused as companies assessed COVID's possible impact, said Fontenot. Similarly today, the economy and pending tax law changes have parties focusing more on using cash on hand to continue growth and doing internal reviews of operations to manage expenses, she said. However, she added, that won't last forever because organic growth is expensive and can take longer than acquisitions.

Initial public offerings are down, and interest seems to have increased in transactions to take publicly held companies private, Fontenot said. Private equity still has "a lot of dry powder," she said. Companies that were planning an IPO but weren't seeing a robust IPO market now are looking at M&A as a more likely outcome, she said.

The strong dollar and the cost of engineering talent in some jurisdictions being low could drive some acquisitions in the tech and fintech sectors outside the U.S., particularly in Eastern Europe outside of Ukraine, Fontenot said. European buys of U.S. companies might be more muted than in the past due to the economy and regulatory issues, she said.

Recession will likely have a limited effect on radio deals because deal flow in radio is already slow, said radio broker Mark Jorgenson. The industry is suffering from a lack of new entrants, low availability of financing, and several years of down revenue -- the same issues it faced going into 2022, he said. Regulatory changes might open the door to more consolidation, but several radio industry officials told us they don’t think such changes are likely under the current FCC, especially with a 2-2 commission. The forecast for radio deals in 2023 is “more of the same,” said Patrick Communications broker Gregory Guy.

TV is “a different beast” and faces “an inventory issue,” where there’s a lack of willing sellers to fuel consolidation, said Guy. Some deals could be fueled by mid-size broadcasters looking to consolidate or make themselves unpalatable for a takeover, Guy said. Industry officials don’t expect regulatory changes that spur TV deals, industry officials told us. If the FCC were to grow to five commissioners, the most likely TV ownership changes would involve the quadrennial review or the UHF discount, and aren’t likely to loosen ownership restrictions, industry officials said.

The eventual fate of the Standard/Tegna deal isn’t likely to signal much about regulatory receptiveness to future transactions said Guy. The circumstances of that transaction -- involving two hedge funds, and financing from a company that owns another broadcaster -- are too specific for its reception at the FCC to signal much about other transactions, he said. If the acquisition doesn’t work out, it could mean Standard or Tegna might seek to become involved in another transaction, a broadcast industry official said.