Tom’s Two Cents: global media & technology edition

The media & technology sector continues to take a prominent share of M&A transactions globally, with strong mid-market deal flow, bolstered by a number of large transactions, including Disney’s bid for 21st Century Fox and Comcast’s bid for Sky, driving the highest aggregate quarterly deal value in the last two years. In the second quarter of 2018, deal activity aggregated at $213bn across 1,688 deals, according to Mergermarket.

Strong M&A activity is driven [in part] by fast-changing technology, and relatively new disruptive models, creating attractive defensive acquisitions for incumbent strategics and high-growth investment opportunities for financial sponsors. It is also supported by generous levels of debt recently available to help fund the transactions.

Borrowers with strong business models and high cash generation can achieve significant lending multiples of up to 6x EBITDA or more. Recent Livingstone-advised transactions such as the acquisition of Capital Economics by Phoenix Equity and the sale of Dennis Publishing to Exponent Private Equity benefited from substantial support from lenders that were eager to back the strong credit characteristics of these businesses.

So what features are lenders looking for to underpin these leverage levels? 

In assessing software and tech-enabled service businesses, lenders value products and services that are mission-critical to customers, embedded in their work processes, and that show non-discretionary spend throughout the economic cycle.  B2B SaaS models are particularly attractive to lenders due to their contractual recurring revenues.

Media businesses can also have high cash-generative characteristics, despite the changing nature of advertising channels in recent years, and the vulnerability of this revenue stream during downturns in the economy. The tick list for lenders includes well-established brands with longevity (#1 or #2 in their segments), and high repeat subscription levels with low churn and high price elasticity.

A common attractive feature across both tech and media businesses is high profitability of incremental sales combined with low capex and negative working capital cycles.

Historically, lenders struggled with early-stage and growth-phase technology companies, however, a growing number of lenders now provide a range of credit facilities, from venture debt through growth and mezzanine credit lines across the maturity stages.

While there is currently an abundance of credit available to the tech and media sectors, navigating the maze of lenders, structures and debt products, and securing the optimal debt-financing packages across various geographies can be a real challenge.  Livingstone’s Debt Advisory teams in London and Chicago have a wealth of experience in financing transactions in these sectors and we would welcome the opportunity to work with you on your next debt raise.

This article was originally published in our Global Media & Technology Report.

1. Source: Capital IQ