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Making sense of the new M&A landscape

Mergers and acquisitions were shifting the industry before the pandemic, now COVID-19 has thrown a new wrench in the works. Can the industry plot a path forward?
June 26, 2020

Like comic-book villain Galactus consuming planets for sustenance, Disney has swallowed up Pixar, Marvel, Lucasfilm and key assets of 21st Century Fox. And with the content from these acquired studios, the company launched streamer Disney+ last November.

AT&T, meanwhile, acquired Time Warner in 2018 after the US Court of Appeals shot down an antitrust lawsuit from the Department of Justice, which feared the telecom giant would gouge rival distributors for Time Warner channels such as Cartoon Network and Boomerang. That same year, Viacom—operator of the Nickelodeon channels—bought tween-focused digital company AwesomenessTV from NBCUniversal and merged with CBS 12 months later, reuniting two companies that had been separated since 2006. Although CBS All Access launched back in 2014, the company announced an expansion of its SVOD offering in February that adds significant library content from newly acquired Nickelodeon and its other broadcast assets.

And it’s not just streamers—content suppliers have been on a similar M&A spree to capitalize on the brand-established product that platforms covet, as evidenced by Hasbro’s takeover of Peppa Pig owner eOne last year and Sony Pictures Television’s purchase of Silvergate Media, which co-produces Octonauts and Hilda.

The swell of recent M&A activity that has seen global players rush to get bigger fast has been driven in no small part by the race to challenge SVOD juggernaut Netflix and keep up with Disney.

With the COVID-19 crisis and forecasted recession, the question of whether more mergers and acquisitions are imminent is clouded by economic uncertainty. But what is certain is that consolidation has redrawn the landscape for children’s entertainment producers, and the ripples are still happening.

One need only look at the type of content producers are pursuing. AT&T has pointed to HBO Max—which launched State-side in May—as the focus of its video strategy. AT&T CEO John Stankey has defined HBO Max’s goal as keeping all members of the family engaged. And while the service will draw kids content from Cartoon Network and Warner Bros. Animation, including The Fungies! and a new iteration of Looney Tunes Cartoons, there are now new doors open to indie studios WarnerMedia wasn’t dealing with before.

“HBO Max has acknowledged the need to offer premium kids content [the way] Netflix and other services do,” says Mark Bishop, co-CEO of marblemedia, the Toronto-based producer of family content like game show Just Like Mom & Dad. “That’s an opportunity for companies like ours that produce live-action scripted and unscripted kids and family content that wouldn’t have had a home on HBO or Cartoon Network.”

AT&T brings deep pockets, vowing to spend up to US$2 billion on the SVOD this year, which “gives HBO Max the confidence to move quickly on projects and invest in a meaningful way,” Bishop adds. “But they are not asking for worldwide rights because they won’t be launching worldwide, which allows for an economic model we know with co-production and international broadcast sales. For producers, it’s the best of both worlds.”

Disney, meanwhile, took control of Hulu (which has signed licensing deals with Disney Channel, DreamWorks Animation and Funimation) as part of its Fox acquisition. But the US platform’s commitment to kids may diminish as Disney signaled its intent to place family-friendly fare on Disney+ and more mature content (including programming from the FX channels) on Hulu.

The shift is a double-edged sword. On one hand, “Hulu was much freer to acquire children’s content. Now it needs a more direct purpose as to what it’s buying, why, and how that will sit next to Disney+,” says Ed Galton, CCO and managing director of London’s CAKE. On the other hand, even with Hulu uncertainty, there are more players in the mix. “In the past, we were very cognizant about shows’ budgets and quick to dismiss ones that were more expensive because there wasn’t an economic outlet for them,” Galton explains. “With the new services, that has changed.”

But in the wake of the Disney/Fox deal, one producer told Kidscreen that with resulting restructuring and layoffs, it’s not always clear whom to approach at a local or regional level, making cold-call pitches a challenge.

Losing long-time contacts and adjusting to new hires is difficult, but staffing changes can also represent opportunities. Vancouver’s Atomic Cartoons, which produces 101 Dalmatian Street for Disney+, sees a significant upside in the House of Mouse’s recent M&A—particularly the ability to leverage that partnership to form new connections.

“It increases our relationship base,” says Jennifer Twiner McCarron, CEO of Thunderbird Entertainment, which acquired Atomic in 2015. “Disney’s Fox takeover gives us more access to Fox as a studio and the ability to turn out more premium content.”

101 Dalmatians Atomic (1)

101 Dalmatian Street maker Atomic Cartoons sees growth in the new landscape.

Along with new faces, prodcos have noticed a shift in programming appetite. Disney+, for one, is looking to independent producers for family-led series.

“Not kids series or co-viewing, but family shows with an adult lead. We don’t see that need in many other places, so that is good,” says David Michel, president of Cottonwood Media (its series Squish is pictured at the top). The Paris-based company produces live-action tween drama series Find Me in Paris for Hulu in the US and Disney Channel in France, Italy and Latin America.

(Lest Euro indies fear a day when Disney and other streamers bring production in-house, Europe’s Audiovisual Media Services Directive requires VOD services offer at least 30% European programming. Additionally, individual nations require streamers to spend a set percentage of revenue earned in that country on domestic production.)

The busier marketplace has also led platforms to aggressively partner with animation houses. Acquiring IP owners and prodcos could be the natural next step. Recently, Millarworld and StoryBots were scooped up by Netflix, while Fox Entertainment picked up Bento Box Entertainment, which operates kids division Sutikki. Moving forward, the Fox group could tap Sutikki to produce for Tubi, the AVOD it purchased in March.

Moving forward, entertainment lawyer Arthur Evrensel anticipates more major streamers and studios will exclusively tie down high-end studio space and capacity, which could drive up service prices for producers.

“The capacity needed to meet demand can’t be built based on current growth rates and the number of animation graduates the schools are turning out,” says the founding partner of Michael, Evrensel & Pawar LLP. His firm works with Canadian animation companies, some of which are considering selling their businesses.

Yet studios that staffed up to meet this growing demand now face a precarious situation with COVID-19 lockdowns looming large—though the crisis hasn’t hit all kid industry businesses equally. Live-action shoots are shut down, and will stay that way for weeks or even months. Animators, meanwhile, have shifted to working from home and are, in some cases, seeing bumps in workload. Insiders confirm that streamers—foreseeing a dearth of fresh live-action content—are striking more deals with animation houses as the coronavirus pandemic continues to intensify.

As for what the pandemic means for M&A activity, Evrensel, for one, forecasts further consolidation, as the crisis underlines the importance of scale when navigating an economic downturn and competing for eyeballs. It will be the companies with the deepest pockets that survive and dominate, he says. “Major studios, streamers and tech companies will go shopping for other companies, libraries and talent before all of this is over to strengthen their benches while prices of select companies are lower than they were pre-pandemic.”

Analyst Michael Nathanson concurs, writing in the report “Say Goodbye to Hollywood” that, with the exception of Disney and AT&T, the other three major studios and two minis will probably need to consolidate, likely favoring the strategy of the music industry in the mid 2000s.

But even Disney isn’t immune from takeover talk, Evrensel adds, pointing to continued speculation that Disney could be bought by the likes of Apple. Indeed, the House of Mouse’s aggressive expansion has created large-scale challenges during the lockdown. While the SVOD has surpassed 50 million subscribers, Disney has shuttered its theme parks and cruises that make up its largest revenue-generating segment, cameras aren’t rolling, summer movie releases are on hold, and TV ratings on its linear channels are trending down. Analysts peg the company’s losses at US$30 million, or more, per day. Companies that deal with Disney might share the pain. According to The New York Times, the conglom has contemplated freezes to development budgets and contractor payments, and is considering eliminating the production of speculative pilots.

Yet as uncertain as things are, industry vet Andy Heyward, CEO of Genius Brands International, believes these recent mergers and acquisitions are simply a sign of business moving forward. Heyward sold DIC Entertainment to Cookie Jar Group in 2008, and five years later merged his A Squared Entertainment with Genius Brands. While anxiety is at an all-time high across the industry, for Heyward, these M&As are nothing new.

“Large companies have been gobbling up kids assets since I’ve been in the business,” he says. “[These properties] are international, evergreen and have CP businesses attached to them. Big companies always want to acquire more and get bigger. I’m sure, at some point, Genius Brands will be sold as well.”

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