The coronavirus outbreak resulted in North American M&A deal value declining -75% YoY during the first half of 2020. Activity picked up again in the third quarter (+23.5% QoQ) as investors and companies alike gained confidence in the financial markets and began to pursue businesses decimated by the pandemic. The abundance of dry powder on balance sheets and availability of cheap money also contributed to the uptick in transactions.
The sports world saw its fair share of mergers and acquisitions in Q3 ‘20. Serie A and French League football teams, gaming companies, sports betting operators and the XFL all changed hands during the quarter. The deal making has continued in Q4 with Topgolf (pending Callaway Golf shareholder vote), Genius Sports, the New York Mets and the Utah Jazz all announcing high-profile ownership changes.
Now that the presidential election is in the rearview mirror (and much of the major event risk has been minimalized), Chris Lencheski says to expect M&A activity within the sports arena to ramp up even further. The Phoenicia chairman and CEO and board member of Granite Bridge Partners’ Winning Streak Sports believes the demand curve for sports properties is actually greater now than it was before the pandemic and that the need for teams and companies to find new revenue streams to offset the lost gate and cascading receipts will only lead to even more deals getting done.
Our Take: The reason Lencheski is more bullish on the sports space now than he was eight months ago is the sports hiatus has validated the belief that sports are more secular than they are cyclical. As he pointed out, “the disruption experienced [by the industry] was in the delivery ‘widowing’ of the games, not the result of a downturn in interest.” Sports have since proven “they are always going to be in demand,” he said, even after a four-month layoff and with no one in the stands. Isaiah Kacyvenski (managing partner, Will Ventures) agreed, saying, “The one thing [we now] know is interest in sports is not going away.”
It’s reasonable to suggest there is a fair amount of “catch-up” taking place within the M&A space (deal volume was down -13% YoY in H1 ’20). But Lencheski attributed the recent rush of transactions to both companies “having a better understanding of where the goal posts are now [than they did when the virus first arrived].” Many people have also since come to accept the new normal (at least until a vaccine is widely distributed) and that norms have changed as a result of the virus. “Teams as well as companies now realize the landscape has shifted and are looking for opportunities to diversify revenue streams or hedge their risk [against no fans being in attendance in 2021],” Kacyvenski explained.
COVID-19 has accelerated the rate of tech adoption leading “smart companies to pivot” and transaction volume to rise, Lencheski said. The digital nature of the acquisition targets has also been a contributing factor to the M&A boom as it has eliminated physical boundaries, enabling companies to fish from a wider pool of potential acquisition targets.
It’s not uncommon for an M&A boom to take place following an economic downturn. As Lencheski explained, “When disruption occurs, new lanes are created and in those new lanes there are opportunities.” There’s seemingly a belief that sports could return to their pre-COVID form by ’22, which explains the three- to 12-month time frame proposed. Some or many of those lanes will close when fans return to the building.
Reports that Pfizer could have a COVID-19 vaccine on the market before the end of 2020 has added some uncertainty to the industry’s short-term outlook that could in theory prevent deals from getting done. But Lencheski suggested the news would more likely manifest itself in a flux of micro tag-and-hold transactions: “In other words, [a company] buying into something with the option to buy more or buy the rest. The reason you’re going to see more of that is because it’s a nice, soft bet that puts the money to work [while allowing the investor to see how things shake out and test-run the management].” Liberty Media buying a ‘look-in’ position on IndyCar via their tag and hold investment in a team is one such example and a smart play to see how Indy operates.
Kacyvenski anticipates much of the investment interest in COVID-19’s wake will focus on the “health and wellness sector. Esports and gaming, too,” he said. All three verticals have enjoyed accelerated adoption trends and are believed to be capable of sustaining the growth. As for Lencheski, he too mentioned digital gaming and said he foresees “a lot of the capital moving into digital media” as well as social commerce.
When the economy first shut down back in March, we suggested the inability to meet face-to-face would make it more challenging to get deals done. While certainly not ideal, that hurdle does not seem to have dramatically altered business, either. Lencheski said with “most of the major players already knowing who each other are,” travel and meeting limitations haven’t been as great a problem as expected. “If you’re picking up the phone asking about another company with a potential transaction, they and their plan or management team existed before COVID-19,” he said.