In more detail

Before the digital age, entertainment companies, such as music labels or film companies, largely relied on physical distribution channels for their vast library of movies and music, selling physical copies in the form of tapes and CDs, among others. This required consumers to make multiple one-off purchases, which were often expensive. Tapes and CDs were also notoriously easy to counterfeit, which often resulted in mediocre profits for legitimate copyright owners.

Entertainment and media consumption is now largely digital, with streaming services having transformed the industry. Consumers now have convenient entertainment choices at reasonable costs as they pay fixed fees to access online libraries of content or use free ad-supported versions.

Digital distribution allows the owners of content, such as music, movies and TV series, to generate a consistent stream of revenue by distributing them through various digital streaming platforms, and this has proven to be a highly lucrative business model.

Therefore, the entertainment sector comes to the current stage where those who own more entertainment content will have more opportunities to generate significant amounts of revenue and profits. Key players and investors in the market – being digital streaming service providers, digital music and movie distributors, large entertainment corporations and some investment funds – are competing to secure more libraries of music, film, and content due to their ability to generate recurring revenue through digital streaming.

As a result, this marks an exciting period for M&A transactions in the entertainment and digital streaming sector, as key players make strategic acquisitions to expand their libraries and ensure they are ahead of the competition. This trend is expected to continue both on the global stage and in Thailand.

While M&A is a quick means of expanding back catalogues for acquirers and investors, and a swift exit method or quick access to partnership or funding for owners of content (the sellers), both investors and sellers need to consider the following key issues and elements associated with entertainment M&A to prepare for the upcoming transactions:

• Transaction structure – It is important for the parties to decide whether the transaction should be done via an asset or carve-out deal, share deal, or further complex structure.

An asset deal is more suitable if the acquirer only wants to expand its catalogue but has less interest in the future capability to generate more content by the selling entity. An asset deal also provides the acquirer with more certainty on associated liability and minimizes hidden liabilities.

On the other hand, a share deal may be more suitable if the parties are looking for a future partnership or would like to carry out a swift buyout transaction.

Tax implications for each transaction structure also need to be carefully considered by both buyer and seller.

• Intellectual property (IP) due diligence and protection – IP is a crucial element in M&A in the entertainment sector, and it is important for buyers and investors to conduct thorough due diligence on IP to ensure that ownership of, or rights in, the content belongs to the target company or selling entity. It is also necessary to verify whether content is subject to any third-party rights or encumbrances. Buyers may also need to consider identifying actions required for a valid transfer of IP ownership/rights.

The seller and the target company should understand the legal requirements of IP protection in order to ensure and safeguard ownership and rights in their music or movie content in preparation for an M&A transaction, as uncertainty regarding these matters can make a proposed acquisition or investment become less attractive.

• Compliance – Especially in a share deal or joint venture deal, the target company must ensure that its business complies with applicable laws and regulations. Most multinational or reputable buyers and investors are compliance-savvy and do not like to see their investments in breach of domestic and global regulations or policies.

For entertainment companies seeking investment, providing a means to address possible non-compliance issues in advance can make the investment more attractive for the concerned investors.

• Risk allocation – It is common in M&A transactions for buyers and investors to seek protections against undisclosed risks or hidden liabilities. Other protection against specific known risks found during due diligence is also necessary. Normally, buyer's protections are dealt with by contractual obligations in the definitive agreement, through warranties and indemnities. Other mechanisms may also be requested, such as deferred payment or earn-outs, in order to address uncertainty overvaluation and financial projections.

Conversely, sellers should seek to put in place limitations on liability in the definitive agreement.

• Retention and non-compete – In some deals (especially for a share deal or joint venture deal), the buyer may want the previous owners or certain management and other personnel (such as top artists and producers) to remain with the target company for a certain period of time. It is also common for the buyer to ensure that these personnel will not compete with the target company's business following the end of the retention period. For these personnel, it might be difficult to agree to such retention or non-compete provisions due to the nature of their jobs or roles in the industry. This matter should be carefully discussed and considered by both parties before concluding the deals and properly incorporated into an agreement.

How we can help

Players in the entertainment industry who are cultivating M&A deals in Thailand will need to find legal advisors who understand the characteristics and industry practices of the entertainment sector and Thai legal requirements to help navigate the deals properly. Baker McKenzie has the experience and depth of resources in advising and assisting clients with seasoned lawyers who specialize in M&A and commercial arrangements in relation to music, film and entertainment industries. Our IP practice group also has experience advising across the full spectrum of IP and TMT-related work. We take pride in our ability to work together with clients to anticipate, manage, and resolve issues, to provide practical advice, and to serve as the "trusted advisor" to our clients.

With a renowned global network and professionals on the ground in 17 cities in the Asia Pacific region and 45 countries across the globe, we can handle all your legal needs, regardless of whether you require a local, regional, or global perspective.

For more information, please contact us.