Notable media insiders argue that Hollywood studios can be taken as specialized venture capitalists with the return on investment (ROI) strategy premised on limited but large bets. Couple this analogy with the famous quote from screenwriter William Goldman. When asked to give a formula for creating a bankable film, with candour he replies, “nobody knows anything.”

Betting might be the right word. Media is not known to be the most risk-averse business. And it keeps changing all the time. Both in US and international markets, the media landscape is evolving. Enhanced viewer experiences are driving the growth of video on-demand services. Businesses respond to this change in various ways. One distinct pattern is market consolidation, particularly through mergers and acquisitions.

Each market is unique in terms of its production and viewership potential, travelability of its content, cultural and political variables. Turkey definitely is unique in its prolific TV production capabilities, its hybrid legal system and a young and vibrant audience base hungry for fresh content.

Some streamers prioritize aggressive upscaling as their prime market-entry strategy, while others prefer to acquire a stake in local and regional players who offer a built-in viewership base, secured governmental licenses and a time-tested local content library. Thus, the consolidation. These are big investments.

From the legal design side of things, M&A deals are more about assuming the operation of a business and less about financing it. For any potential financier —be it strategic or a financial investor— moving from a production-specific financing mindset to a higher volume M&A investment, the assembly line as a whole must inspire confidence as a longterm business.

The media business is no exception. Behind its glamour and allure, lies a business that should project financial predictability and sustainability to its shareholders.

M&A in Turkey: Outlook

Mergers and acquisitions are relatively well-established practices in Turkey, attended by a competent and experienced advisory class. This goes for media and other sectors as well.

Some key legal patterns of Turkish M&A’s are as follows:

Vertical vs Horizontal Acquisitions: Broadcasters, OTTs, Production Companies

Strategic M&A deals struck between media companies can manifest in different forms and at different levels of the content protection cycle. The Turkish market has witnessed foreign media outlets partnering with local broadcasters to form JV type partnerships, as well as vertical integrations by which linear or OTT broadcasters purchase a stake in their main suppliers, i.e. production companies.

Government agencies step in certain acquisitions. In both vertical and horizontal acquisition forms, hitting predefined market consolidation thresholds trigger antitrust clearance requirements by the Turkish Competition Board. Certain changes in shareholding structures in broadcasters and OTTs catering to the Turkish market require amendment filings on their RTUK (Turkish media watchdog) licenses. Acquiring equity shares of non-broadcasting entities such as production companies, distribution companies, rights management companies, talent agencies and non-broadcasting studios do not require RTUK’s approval.

Acquiring the Business vs Acquiring the Library & Output

In media business, it is often said ‘content is the king’. Intended to serve as a reminder of the fact that good content is the main revenue driver, this mantra also captures the scale of the troubles awaiting the streamers if their content is poorly made or poorly communicated. In a ‘hits-pay-formisses’ business like a media business, good media content generates enough cash to trump many other shortcomings, just like a library consisting of mediocre content risks bringing down entire organizations.

Media M&A investors want to ensure that what they are buying is valid enough contracts for the ready-made IP library, and binding enough contracts underlying the target company’s future-looking original production pipeline. Turkish law, just like its continental counterparts, is restrictive on the transfer of copyrightable works before they are created. (Article 48 of Law on Intellectual and Artistic Works)

In order for a transfer of a cinematic work to be legally binding, it has to be effected post-shooting. What does this say about future-looking Output Deals? It certainly creates the need to introduce additional legal protections around the transfer commitments.

The media market is largely populated by repeat players who resort to business sanctions more than legal sanctions. Taking into account the cross-border litigation costs, blacklisting defaulting counterparts is often a more reasonable course of action for media companies, than suing them. But the scale drastically changes when it is an M&A type acquisition where neither party can afford to proceed with an under documented, enforcement challenged legal framework.

Media M&A investors want to ensure that what they are buying are secure enough contracts for the ready-made IP library and binding enough contracts for the target company’s future-looking original production pipeline.

Debt-stripped library and license transfer deals

Turkish law is restrictive on liability-stripped business transfers. Article 202 of the Turkish Code of Obligations prohibit businesses from transferring their asset portfolio –e.g., contracts, employees, inventory, cash— in a manner that carves out existing liabilities of the transferring business if the totality of the items transferred, when put together, amounts to a business in itself. If such transaction is formulated in an assets-only, debts-left-out structure, the left out debts will be deemed assumed by the transferee along with the assets it acquires.

The idea behind Article 202 is to protect the creditors of the business from being left out with their receivables due from a shell company whose assets are looted, and capital reserves emptied. The principle equally applies to asset-only, libraryonly media acquisitions.

Valuation Challenges for Target Company IP Inventory

Valuing IP rights in an M&A deal comes with its complications. No any two media content, no matter how similar, will be priced the same. Likewise, not all TV and film projects will be exploited across each potential rights category. From merchandising rights to theatrical rights, from adaptation rights to free-to-air rights, categories that a media content can find new revenue channels are numerous and fast-evolving.

The same variety of options also come to the fore regarding the question of timing. Sequencing of rights in relation to whether they’re exploited first, second or simply all at the same time varies from deal to deal. While one movie might get released to thousands of theatres across several countries on the same date, another might premiere on TV first (or even on a VOD platform). Add to this the fact that the shelf life of media content is practically infinite and can each stage of its life cycle be commercialized for very long years, albeit often for a decreasing valuation.

Now consider these variables being applied to not one or two shows, but to an entirety of content packages and libraries owned by media companies. Financially valuing an IP inventory with these vibrant and complex rights attached comes with its challenges and entails certain necessary deviations from standard share valuation models.

It becomes vital for the potential buyer of a media company to conduct a legal-first valuation study on the target company’s IP inventory. This legal study goes beyond mere due diligence work and does not limit itself to identifying legal risks. It is a mapping out of the library of IP rights booked and un-booked under target company financials. And because all these rights are created and secured by written IP license contracts, valuation team must ensure the legal basis of whether or not commercializable rights categories do actually exist or actually add up to what the seller suggests in its bid for a higher share price.

Management Design: Balancing the powers between creative & business executives

Media M&A’s have a unique feature that sets them apart from M&A transactions conducted in other fields of business. Be it a TV network or a legacy studio business, a considerable part of the target media’s asset portfolio consists of its off-screen creative talent contracts and its viability as a lucrative business dependent on how integrated a role it offers to its creative executives among the decision making brass of the company.

Film and television content are often referred to as experience goods, as distinct from ordinary goods. An experience good in the sense that the consumer cannot accurately or fully assess it until consuming it, whether that is via watching a film or TV show. This renders valuation of the content and rights catalogue of a media company, as well as the bankability of its original productions in development, very difficult to assess without the guidance or input from its creative professionals. These professionals do not necessarily come from corporate backgrounds or hold management degrees, yet they play a vital enough role as any other C-level professional of media companies in boosting their bottom line and stock price.

The need to balance investor control with creative flexibility pushes Media and Entertainment M&A’s to significantly deviate from conventional management design structures often opted for in other M&A deals. This is especially so when the buyer and the seller agree on a contract where they share control.

The following examples may illustrate where problems may arise if the creative vs business balance is not appropriately calibrated.