Media Sector Review October 2021

Gaming and Digital Publishing M&A Remains Elevated

As shown in the chart, the best performing Index over the last twelve months has been Digital Media stocks (+65% on a market weighted basis), followed by Ad Tech (+51%), Social Media (+37%), MarTech (+17%), and Esports & iGaming (-1%). Helping to drive returns has been a robust M&A marketplace, particularly in the gaming and digital media sectors.


Internet and Digital Media M&A Continues at a Robust Pace in 3Q 2021

M&A activity in 3Q 2021 in the Internet and Digital Media sector continued at a robust pace in 3Q 2021, as Noble tracked 137 deals worth $46.4 billion in the Internet & Digital Media sector vs. 116 deals worth $29.1 billion in 3Q 2020. The number of deals increased 18% year-over-year, while the value of deals increased by nearly 60% over 3Q 2021. On a sequential basis, the number of deals decreased by 6% while the value of deals increased by 55%. Year-to-date, the number of deals has increased by 24% (to 462 deals this year vs. 374 deals last year) and the value of deals has increased by 121% to $109.2 billion from $49.5 billion in 2020.

For the third quarter in a row, the most active sectors were Digital Content, with 47 transactions, followed by Marketing Technology transactions (32). The Agency & Analytics (20), Ad Tech (16) and Information (14) sectors also remained active.

From a deal value perspective, MarTech deals led with $23.3 billion in transaction value, followed by the Digital Content segment with $8.6 billion in deal value, followed by Information services with $8.2 billion in deal value. Driving deal value in the MarTech sector was Intuit’s $12 billion acquisition of email marketer MailChimp, and Thoma Bravo’s $6.5 billion acquisition of customer experience software provider Medallia.

Gaming and Gaming Related Deals Top Digital Content M&A

The video gaming and game developer sector had the largest number of transactions (20) and accounted for $5.2 billion in M&A during the quarter, slightly down from 20 deals accounting for $7.8 billion in 2Q 2021.

Notable deals include Netmarble’s $2.2 billion acquisition of mobile game developer SpinX Games, and DraftKings’ (Nasdaq: DKNG) $2.0 billion acquisition of Golden Nugget Online Gaming (GNOG). Golden Nugget operates online casino games, but also owns an igaming betting platform. There were also two gaming platform deals during the quarter: Unity Software’s $320 million acquisition of Parsec Cloud, and Roblox’s $90 million acquisition of gaming platform Guilded.

Gaming, Sports Betting and Media Converge

We continue to see a merging of the gaming, media and sports betting industries and we expect some of the lines between these sectors to begin to blur as incumbents in one sector enter the other two. Casino gambling, internet gambling, sports betting and daily fantasy sports are no longer separate silos. Gambling companies see the unique audiences of gaming and esports audiences and see that combining them or partnering with media companies can help them expand the reach of gambling.

The catalyst for some of this activity is government legalization of online gambling and sports betting, which is creating opportunities for media companies, gaming companies and sports teams. The rise of fantasy sports leagues is seen as an entrée into sports betting, and a belief that sports betting leads to greater fan engagement. This would constitute a win-win-win for sports teams/leagues, media companies and gaming companies. This logic can also be seen in Penn National Gaming’s (Nasdaq: PENN) $1.8 billion acquisition of Score Media and Gaming (TSX: SCR) for 96x trailing revenues. Penn clearly sees Score Media’s content as the perfect content to drive sports betting and fan engagement for Penn National. We also note that DraftKings made a $25 billion offer to acquire Entain (LSE: ENT), a U.K. sports betting and gaming company. We do not include this transaction in our analysis, as Entain has yet to agree to terms. We expect continued M&A as the gaming, sports betting and media sectors converge.

Finally, while not an acquisition, we would note traditional media company E.W. Scripps’ $10 million investment into Misfits Gaming Group (MGG), a global esports and entertainment company. The deal further confirms the synergies between esports companies and media companies. MGG owns three esports teams, content creators, and a full-service, in-house media team. While the deal was an investment and not an acquisition, it is noteworthy given that it represents another traditional media company has put its toe in the esports pool.

The Search For Scale Continues for Digital Publishers

Within the digital media sector, there were several subsectors that were active. Last quarter saw a pickup in M&A activity in the digital publishing sector, with BuzzFeed selling to a SPAC, BuzzFeed acquiring Complex Media, and Graham Holdings acquiring The Leaf Group. The third quarter saw a continuation of elevated M&A activity of digital publishers as owners seek scale to better compete with the “walled gardens” of Facebook, Google, Amazon and other social media platforms.

Noble tracked 16 digital publishing deals worth $3.8 billion during the quarter. In addition to the previously mentioned Penn National Gaming’s $1.8 billion acquisition of Score Media and Gaming, notable deals included, Axel Springer’s $1 billion acquisition of Politico, and Forbes selling for $620 million to a SPAC. The largest digital publishing deals in 3Q 2021 are shown below. Subsequent to quarter end, IAC group’s DotDash agreed to acquire Meredith Corporation (MDP). While technically a traditional media business since 65% of Meredith’s revenues come from its magazine division, the deal does create a Top 10 digital media publisher. We expect continued M&A announcements in this sector as operators seek scale to take share in their respective sectors.

Esports & iGaming - Have the stocks bottomed?

Noble's Esports Index underperformed the general market in the third quarter, down 4.5% compared with a modest 0.2% increase for general market. During the third quarter, only 5 esports stocks out of 16 were in positive territory and only 7 are up for the year. On a trailing twelve-month basis, the Index lost 0.7% compared with the general market’s 28.1% gain. Importantly, Noble’s Esports Index performed better than the previous quarter, which declined 12.7%, providing a glimmer of hope that the stocks may be near bottom.

We find it interesting that the weak stock performance does not reflect the current fundamentals for the industry. According to Limelight Networks, video gamers spent an average of 8 hours and 27 minutes each week playing video games in 2021, an increase of 14% over 2020. This is an increase from the depths of the Covid stay at home mandates in 2020. Many investors believed that the time-consuming video games could not go higher. It did.

Notably, if video games were rated like TV stations, there would be more people gaming than watching some popular TV shows. It is not surprising that E.W. Scripps, a television broadcaster, has taken interest in esports. E.W. Scripps is certain to use the investment in MisFits Gaming as a programming element for its Florida based television stations. It will be interesting to see whether esports programming on TV stations will drive viewers. If successful, there will likely be more companies like Scripps looking for programming options in the esports industry.

Social Media Underperforms - Facebook Faces The Music

One of the weak performers in the quarter was Noble's Social Media Index, down nearly 2%, with most of the stocks in the index down for the quarter, including Facebook, down 2.4%. Facebook was hit on several issues in the quarter, including privacy and on testimony in front of a Senate subcommittee from a whistleblower, Frances Haugen, a former data scientist at Facebook. First, Apple stepped up privacy by allowing users to opt out of tracking across every app on its service. Notably, there were a large number of customers that chose to opt out. As a result, Facebook is not able to track user behavior, limiting conversion data for the ads run on its platform. One traditional advertising company executive exclaimed that the lack of conversion data for Facebook now puts it on par with traditional media companies that must use attribution data to determine success of advertising. Thus far, media companies have not been able to capitalize on the current Facebook conversion data issue.

We believe that the conversion data is potentially more troubling for the company than the testimony from the whistleblower, which largely portrayed Facebook as a greedy company that knows its services are detrimental to children. While Congress seems keen on regulating the company, there does not appear to be a consensus on how to rein it in.


The following is an excerpt from a recent note by Noble’s Media Equity Research Analyst Michael Kupinski


We believe that media companies are beginning to see the ripple effect of the supply issues and inflation pressures that is affecting the general market. The lack of truck drivers in some ports are creating a bottle neck to move product. There are chip shortages, which appear to be limiting the supply of new cars. In addition to supply issues, there are labor shortages in many sectors that appear to be limiting services and product, contributing to inflationary pressures. The fall-out from these issues may be hitting some of larger markets where the economy is largely felt. The question is whether or not these issues will have a direct affect on the advertising recovery? We believe it is and it may become evident in the upcoming third quarter results. Given product shortages, companies may not advertise products that consumers have difficulty finding.

Advertising has a direct correlation to discretionary income. If consumers do not have the discretionary income to purchase, then there is no need to advertise. As such, companies may cut back on advertising given the prospect that consumers have less discretionary income in an inflationary environment. While we raised the inflation concern in our previous quarterly report, the Fed and the government indicated at that time inflationary pressures would subside in the second half. This was based on the prospect that the economic rebound would moderate, easing inflationary pressures. Now, the Fed has indicated that it will begin raising interest rates, which was different than the prospect of keeping interest rates low for an extended period of time.

Such a prospect of rising interest rates, given the already tight supply issues, could stall the economic recovery, leading to "stagflation". Stagflation refers to a period of persistent high inflation with high unemployment and stagnant demand in the economy. What is worrisome is that this is a cost-push inflation environment, disrupted by the ability to bring the goods to the market. Media fundamentals tend not to do well in this economic scenario, which decreases advertising price elasticity. Media stocks tend to have issues as well. There tends to be a contraction in media stock valuation multiples.

Noble is cautiously optimistic that the fundamental environment leans favorably. Furthermore, media stock valuations appear reasonable to favorable. Investors should be selective, however, favoring companies with a growth element and those with a bent toward smaller markets. Noble believes that the sell-off in digital media and esports industries appear to be overdone. There appears to be a cycle rotation toward larger cap stocks, which offer liquidity. But valuations appear compelling, particularly in the esports & iGaming segment, offering a favorable risk reward relationship.

Broadcast Television

A Content Push

Broadcast Television stocks had a difficult quarter, ending down 2.9% versus a modest gain for the general market. The weakness is somewhat surprising given the current rebounding advertising environment, especially as we approach another political year in 2022. The stocks were due for a breather, however, up a solid 49.1% in the past 12 months. Bucking the trend in stock performance in the quarter was Entravision. The stock was up 6.3% in the quarter out-performing the industry and the general stock market. Entravision is riding a wave of an acceleration in its revenue growth from recent acquisitions in digital marketing. The company's digital businesses now account for more than 70% of total company revenues.

We believe that there were several important developments in the quarter. One development highlighted the industry's ongoing debt reduction strategy. Another development focused on several companies' investments into programming and/or content.

First, in the latest quarter, E.W Scripps increased free cash flow guidance for the full year from a range of $210 million to $240 million to a range of $240 million to $260 million. Consequentially, its debt leverage multiple is expected to be in the low 4s by the end of next year. Furthermore, the company made a small, but important investment into esports, described earlier in this report. In spite of the favorable news, SSP shares under-performed its peer group in the latest quarter, down 11.4%. We believe that the performance follows the trend that if the industry gets a cold, SSP shares catch a flu. Conversely, if the TV stocks perform better, SSP shares tend to outperform. We believe that the company is in a strong position to benefit from an influx of political advertising in 2022. In addition, we encourage investors to view the company's recent video presentation on, which highlights its differentiated approach to the industry and its favorable growth potential in its Over-The-Air (OTA) and Over-The-Top (OTT) platforms and networks.

Another development in the industry was on the content investment front. In addition to E.W. Scripps investing into esports content, Gray Television announced that it acquired Third Rail Studios from Integral Group for $27.5 million. Third Rail Studios is located adjacent to the studio compound that Gray is building in Atlanta. It has notable clients including Netflix and Apple and is known for such series and films as Ozark, Mile 22, the Dolly Parton series and the Ballad of Richard Jewell, among others.

We believe that investors will focus on the upcoming third quarter results, which will reflect tougher comparisons to the year earlier influx of political advertising and improving advertising trends. It is likely that the hoped-for improvement in certain categories, like auto, may be elusive, given the ongoing chip shortage and supply issues. We believe that any potential revenue disappointment may be short lived as investors focus on 2022 and the expected large influx of political advertising.

Broadcast Radio

Hitting the Refresh Button

Noble’s Radio Index declined 3.0% in the third quarter, giving back some of the strong gains over the past year. On a year-to-date basis the Radio Index is still up a remarkable 66.4% and 131.6% over the past 12 months. So, it was not surprising that investors took some chips off the table. Among the strongest performer in the group in Q3 was Salem Media Group, up a strong 45.7%. The company benefited from a refinancing that de-risked its balance sheet and put the company on a path toward significant debt reduction. The refinancing lengthened the maturity of roughly 50% of its debt to 2028, with a modest increase in its interest rate. With the company's free cash flow, current cash and availability on its revolver, the company has the ability to pay off its debt which comes due in 2024. We believe that the refinancing assuaged investor concerns over the company's relatively high debt leverage.

Another highlight in the last quarter was the continued movement to re-brand. Townsquare Media was among the first to highlight the fact that it no longer was a "radio-first" company and that it was now a "digital first" company. The move to re-brand followed strong growth in its digital media segment, which now accounts for nearly 50% of the total company revenues and cash flow. In the latest quarter, Cumulus Media used the platform to announce in its new investor presentation its re-branding as an "audio-first, multi-platform" company. These moves were designed for investors to focus on the growthier elements of the companies.

Following through on its multi-platform strategy, Cumulus announced a content distribution partnership to bring Cumulus's 413 radio stations and podcasts to the Audacy platform. We believe that the move provides a significant boost to Audacy to scale its digital platform, competing with recent moves made by iHeartMedia. The Audacy app has over 2,000 local and national radio stations, from more than 100 markets and podcasts. For Cumulus, it allows the company to distribute its content on multiple platforms to make it available "anywhere and anytime people want to enjoy it." While terms of the agreement were not disclosed, we believe that it is based on a revenue share, a win-win for both companies.

The latest move follows Audacy's radio station "land" grab with other station operators including the 57 Urban One stations, located in 13 markets, announced in August. As a result, the Audacy digital media platform now boasts stations from Alpha Media, Beasley Media, Bonneville, CodComm, Cox Media Group, Entravision, Mid-West Family Broadcasting, Salem Media Group and Seven Mountains Media. These agreements follow iHeartMedia's July 29th move to partner with TuneIn to distribute its 850 digital stations and podcasts on its platform. We believe that iHeart is capitalizing on its recent purchase of Triton Digital to provide advertising and programmatic sales on its platform. We believe that these moves toward digital platforms and recent re- branding are a solid strategy to reshape the narrative of the industry and to hit a refresh button with investors.

We are concerned that the supply issues in the general economy may adversely affect large market radio advertising in the near future. Companies may simply cut back on advertising should supply constraints continue. We believe that smaller market radio stations may fare better. In addition, companies with diversified revenue streams in growthier digital media platforms should perform better. Finally, we believe companies that have solid debt reduction strategies should assuage investor concerns should the general economy falters.