SE Asia media peaks PE’s interest

In 2011, while investment into media accounted for less than 1% of private equity deal value across Asia, three important transactions were realized in Southeast Asia. The wave of activity in this sector began in March, when CVC Capital Partners acquired a 49% stake in Link Net, Indonesia's second largest fixed broadband and cable TV operator.

Saban Capital Group, which opened its first Asia office in Hong Kong at the start of this year, completed the other two deals in this space. Last October, the media and entertainment investor purchased a 5% stake in Media Nusantara Citra (MNC) - Indonesia's largest and only vertically integrated media company - from Global Mediacom for $78.2 million. This was succeeded in December by the announcement of a joint venture between Saban-backed pay-TV distributor Tiger Gate and Malaysia's Celestial Movie Channels, resulting in the establishment of pay-TV and movie operator Celestial Tiger Entertainment.

"There's actually been a major shift in terms of interest in the media industry over the past 18 months or so," says Sebastien Lamy, a partner in Bain & Company's Southeast Asia office. "It's interesting because historically there's been very limited activity in this sector in Southeast Asia, but this is changing quite a bit."

Results from a joint survey conducted by Bain & Company and the Singapore Venture Capital & Private Equity Association corroborate this. Media was considered a priority sector for 32% of GPs in the region, putting it ahead of the usual sweet spots of consumer, energy and healthcare for the first time. Saban Capital, meanwhile, demonstrated its continued confidence in Indonesian media this week, becoming an anchor investor in the $228 million IPO of the nation's largest pay TV company, MNC Skyvision, alongside Creador Capital.

Brand ambitions

The main driver behind this surge in interest is the region's expanding consumer base. According to the World Bank, from 1999 through the end of 2011, the number of middle-class consumers in Indonesia alone grew by 50 million to more than 130 million, while the likes of the Philippines, Thailand and Vietnam are also benefitting from a boom in consumption and each boast young, increasingly wealthy populations.

The knock-on effect of this is that more and more advertisers are being attracted to the region, and it's not only the traditional conglomerates - such as Proctor & Gamble, Unilver and L'Oreal - that are bringing about a meaningful rise in dollars dedicated to this market.

"You have populations going from bicycles to motorcycles, and from motorcycles to cars, which is drawing a lot of advertising from international car manufacturers," explains Patrick Corso, a managing director at Providence Equity Partners and head of the firm's Hong Kong office. "You've also got an increasing amount of domestic players who are spending a lot more money, especially domestic banks, as more people start opening up accounts and the financial services industry gains maturity, and then the mobile telecom operators."

Advertising-driven businesses, and in particular television, have emerged as the principal beneficiaries of this rise in spending. Indeed, television, driven by the dominance of free TV, will have approximately 70% of the ad market in Indonesia by 2016, which is perhaps unsurprising when one considers that the archipelago consists of nearly 14,000 islands. Free-to-air broadcasting appears the only way for many advertisers to reach a nationwide audience.

From a private equity point of view, the best approach may be to own an integrated media company, as opposed to an isolated free-to-air channel, however. Businesses that supply content through multiple distribution channels - namely free-to-air, pay-TV, online and print - stand to benefit heavily from the demand for advertising space, as their flexibility of medium allows them to target customers on a local, regional and national level.

Southeast Asian companies able to target diverse audiences in this way include Saban Capital's MNC; Filipino TV network ABS CBN, which counts Marathon Asset Management among its backers; Malaysia's Media Prima, which is listed on the Bursa Malaysia; and Manila-based GMA 7, which is reportedly close to being acquired by TV-5, its smaller rival, and private equity is thought likely to participate.

It isn't simply a case of advertisers increasing their allocation to Southeast Asia though. As advertising spend grows - fast-moving consumer goods brands spent 24% more in Indonesia in the first quarter of this year than in Q1 2011 - the other factor that is helping free-to-air companies in particular is that their advertising inventories tend to be fixed or can only be expanded very gradually. Demand is therefore outstripping supply, which translates into higher advertising rates and correspondingly, higher profits for firms.

As a result, advertising dollars that cannot find space in free-to-air are spilling over into other media. The newspaper and outdoor advertising markets in Indonesia, for example, will be among the fastest-growing in the world over the next five years, according to PricewaterhouseCooper's Global Entertainment & Media Outlook, with compound annual increases of 11.2% and 11% respectively.

"Print and radio are growing at robust rates - not as high as free-to-air, but these are important mediums in the advertising ecosystem in Indonesia," says Sumeet Jaisinghani, a Hong Kong-based director at Saban Capital. "Internet advertising - display advertising, search and online video - is also growing rapidly, but still represents a very small piece of the pie."

How much is too much?

Although a significant re-rating of media equities has occurred since the second half of 2010, particularly in Indonesia, valuations do not seem to be a barrier to entry. Market leaders such as MNC and Emtek - whose media division consists of two free-to-air channels, SCTV and O Channel - achieved valuations of around $3 billion at the end of June. A smaller Indonesian player, Viva, was valued at $1.2 billion - or 33x its projected EBITDA for 2012. For some, it does seem that in hindsight, bargains were there for the taking around four years ago.

The three landmark private equity transactions in the space, however, were sourced proprietarily. Saban's investment in MNC and CVC's backing of Link Net came through partnerships with the tycoons who own many of the region's prize assets. Saban teamed up with media magnate Tanoesoedibjo for MNC, while CVC worked with the Riady family, which owns LinkNet's parent First Media.

"For a PE firm to come in at valuations of anywhere between 8-10x forward EBITDA, it's a reasonable bet, particularly when you can get 20-25% IRR out, and that's what a lot of the Indonesian deals are going to lead to," adds Media Partners' Couto.

For most, the route to achieving these returns lies in the capital markets. Due to foreign ownership restrictions, and the fact that most PE firms are minority shareholders alongside a controlling founder or family, an IPO or a follow-on offering would be the preferred exit. The least likely scenario is arguably a large international media conglomerate swooping in to buy control of the asset, although market consolidation is a more realistic prospect for smaller players.

The road to investing in the region's media industries isn't entirely free from obstacles. Foreign Direct Investment regulations prevent PE firms from overseas from acquiring majority stakes in most companies in these markets [in Indonesia, a 20% cap exists for non-listed entities; 49% for listed entities]. And in Singapore and Malaysia, the television sector is government-controlled, meaning there are few opportunities for private investors to participate. The biggest problem affects would-be investors into pay-TV in Thailand, though, due to the lack of a media regulator in the nation and the difficulties obtaining local licenses.

For the likes of Saban and Providence, however, the wealth of targets and prospective returns far outweigh any of these concerns.

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• Topics
• Southeast Asia
• Media
• Expansion
• Philippines
• Indonesia
• Thailand
• Vietnam
• Providence Equity Partners
• Saban Capital Group
• Media