Thoughts on the proposed TFI / M6 merger

1. First of all, it is extremely unlikely this deal would have been structured, given the political / regulatory implications, without input from the French Government / regulators. So it is likely to be approved, with some possible tweaking / disposal of non-core assets. TF1 and M6 are likely to claim that the addressable market for competition purposes has expanded given the introduction of streaming services as well as global online services such as Google and Facebook taking an increasing share of advertising.
2. More importantly, there is the political aspect. Bouygues (which will own 30% of the merged entity and have executive control) has close links with the French Government and President Macron – due for re-election in April 2022 and facing the possibility of losing to the nationalist candidate, Marie Le Pen – is unlikely to oppose the deal given it would lay him open to charges from Le Pen he is not doing enough to protect key French cultural assets.
3. The deal has been structured to get round the French regulatory restrictions around one single shareholder owning more than 49% of a broadcaster. The M6 broadcasting assets will be held in a separate entity (“M6 Edition”) which will be 48.3% owned by the new combined group, thus replicating RTL’s stake in M6. For all intents and purposes, though, the broadcasting assets will operate as one effectively.
4. From a strategic perspective, the obvious aim is to create a French national champion with scale to compete with the global streaming giants, which can promote French culture and compete effectively. In fact, a key headline in the statement explicitly states the deal will lead to an “Acceleration of the development of a French streaming champion combining a catch-up and live streaming offer (based on MyTF1 & 6play) and a SVOD service.” (TF1 and M6 already cooperate on the SVOD side, with Salto). Scale-wise, the new entity will still be a minnow compared with the other groups but will have significant scale – the new entity would have had combined revenues of €3.4bn in 2020, with €461m adjusted operating profit. Given the likely profit uplift from an advertising recovery, together with the planned €250m-350m of synergies, the new group is likely to have close to c. €1bn of annual operating profit moving forwards.
5. One question is the effect on how the deal impacts the global streaming companies in France. It is not hard to imagine the French authorities favouring the new entity and / or placing additional burdens (mostly around local content) on the non-French players. In fact, regulatory rules on the streamers are likely to increase throughout Europe as Governments look to rebalance the scales in favour of national broadcasters.
6. French advertisers face a dilemma. A combined TF1 and M6 will absolutely dominate the French TV advertising market. There are likely to be pricing regulations brought in (as happened with ITV when it was formed, although the terms will likely be different) but it still leaves French advertisers wanting to advertise on Television with no credible alternative. One possibility is there a degree of leakage to other platforms, such as Online, Out of Home and Radio. Advertisers may be unhappy but it is unlikely to change the course of the deal.
7. Two bigger questions here. The first is what this means for the future of RTL group. The deal means RTL has effectively exited France (even though it keeps a 16% stake in the entity) and possibly Belgium. RTL will gain a substantial amount of cash (with the partial sale of its stake, together with the dividend distribution, probably around €800m) but this is unlikely to be used to buy other Broadcasting assets, especially given the speculation around whether RTL will “buy” the Gruner and Jahr publishing division from its majority shareholder Bertelsmann. One other question is what happens to RTL’s 18.65% stake in Spanish broadcaster Atresmedia, especially in a scenario of consolidation within the Spanish TV advertising market (see below).
8. The second question is what this means for consolidation amongst other European broadcasters. The rationale for the TF1 / M6 deal, namely to create bigger entities that can deal with the threat posed by the global streaming giants, also applies to the other Broadcasting groups. The two most likely candidates for further consolidation – given the potential for likely political / regulatory support, the business rationale and the shareholder structures where there are major shareholders who would facilitate a deal – would be Germany (between ProSieben and RTL) and Spain (Between Atresmedia and Mediaset Espana). It is very hard to imagine a merger in Italy, given it is the Berlusconi-controlled Mediaset and state-owned Rai that dominates the market. The UK is also unlikely given an ITV-Channel 4 merger would control c. 70% of the advertising market, although it couldn’t be fully ruled out, especially given (1) the UK Government not ruling out selling state-owned Channel 4 and (2) question marks over the long-term viability of Channel 4 as a stand-alone entity. 

Link to press release: https://groupe-tf1.fr/en/investissors/regulated-information