The film, television, and digital content production industries are ripe for PE investment, thanks to shifting revenue structures and European quotas.

By Tom D. Evans, Farah O’Brien, Libby Savill, David J. Walker, Rachael Astin, Jon Fox, and Catherine Campbell

Camera lensThe extraordinary growth of entertainment streaming platforms over the last decade has made investments in the film, television, and digital content production industries more attractive than ever. Large-cap buyout firms have competed with strategic acquirers to invest heavily across the sector, with Amazon’s US$8.45 billion acquisition of MGM underscoring the level of interest. Unlike many industries that were adversely affected by COVID-19, the film, television, and digital content production industries have grown. This growth is driven not only by the “streaming wars”, with more and more platforms vying for eyeballs and subscriptions, but also by a now truly-global sector, leveraging online platforms to reach a worldwide audience.

Blockbusting deals for specialist consumer content

While the sector is undoubtedly broad, recent transactions have focused on content makers with strong consumer appeal and a distinguishable voice (including brand, genre focus, track record, and/or depth of library of rights) — a trend that we anticipate will continue as consumers seek out content aligned with individual interests, rather than commissioner preferences. For example, Blackstone is building a next-generation media company, Candle Media, which has so far acquired Reese Witherspoon’s production company Hello Sunshine (the co-producer of television series The Morning Show), the digital-first children’s media company Moonbug Entertainment (the studio behind Cocomelon), and a minority stake in Will Smith and Jada Pinkett-Smith’s production business Westbrook, amongst other assets. In addition, Apollo has invested in Legendary, the movie studio behind the 2021 blockbusters Dune and Godzilla vs. Kong.

Changing sector structures and revenue opportunities

At the same time, revenue structures in the sector are also changing, providing greater visibility of company earnings. While traditionally film and television production companies shared the risk and reward of distribution (through a negotiated participation in revenues derived from the exploitation of the content through its various distribution cycles (the “back-end”)), streamers now frequently buy rights outright and pay a premium upfront. This obviates both the risk and the potential upside of a back-end participation, but as a result production houses can predict their cash flows with more certainty, making them more suitable for leveraged buyouts and the burden of debt servicing.

Further, film and television content can transcend the screen, leading to additional revenue opportunities for PE owners. Production houses can cross-pollinate, develop, and scale content across multiple platforms and languages. Moonbug Entertainment has developed television content for Netflix and toys for Mattel, while Westbrook has produced programmes for social media platforms including Snapchat to leverage the Smiths’ global reach.

Talent incentivisation is key

To develop and scale high-quality content while keeping up with demand, film and television production companies rely on key creative executives and nurturing talent relationships. This makes strong incentive packages for management teams an important competitive consideration, and PE buyers are well-positioned to differentiate themselves from strategic acquirers in this respect. Recent deals have involved a range of tools to incentivise management including rollover and management equity plans, earn-outs, employment incentives such as bonuses, retained management creative freedom, and carefully crafted employment agreements.

Impact of regulation

As global streaming platforms look to bolster their offerings, we anticipate that European production companies and film/ television infrastructure providers may be particularly attractive targets due to the EU’s Audiovisual Media Services Directive (the Directive). The Directive imposes quotas on streamers to carry 30% of European works in EU countries, and with the top eight streaming platforms in the US poised to spend US$115 billion on content this year, streaming platforms are being forced to buy and commission more European content. While regulatory challenges remain in certain European jurisdictions (where some nations limit foreign investment in media companies, particularly those that hold a broadcasting licence), we anticipate that the Directive will further boost local producers, sound stage and physical stage companies, and visual effects specialists.

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