Sony announced it has acquired the remaining equity capital of Nevion that it did not already own. The acquisition builds on Sony taking a minority equity stake in Nevion last July.
The press release announcing the full acquisition makes an economic use of words, totaling just 293 words – and 269 when stripping out mentions of Nevion and Sony. Even in its brevity the release reiterates the rationale for the original investment and subsequent full acquisition. Mikio Kita, VP of Media Solutions Sony, states “As the Sony Group, we pursue technologies to achieve ‘Remote’, ‘Reality’ and ‘Real time’ solutions. With Nevion’s acclaimed expertise, we will deliver more integrated and optimal experience for our customers.”
The word choice in the press release aligns with recent Sony executive statements (discussed below).
For a deeper review of the strategic rationale of the deal, especially the alignment with Remote Production (REMI), we wrote extensively on the topic as part of last year’s announcement. COVID-19 has only accelerating the trend toward REMI as evidenced by the trend ranking 5th in the 2020 Big Broadcast Survey Global Trend Index.
Review of Sony Executive Comments
There were no financial disclosures as part of the announcement. Sony has, however, made several public comments about its pursuit of technologies around Remote Production. When discussing public Sony comments relevant to the global media technology sector, some context is necessary.
Sony’s broadcast technology product and service portfolio are reported as part of a $3.5B product category of a $18.3B division within the $75+ billion revenue corporate portfolio of Sony. It is therefore rare to hear comments specific to the media technology sector in Sony’s investor communications.
With that as the lead-in, Sony’s President and CEO Kenichiro Yoshido presented the below slide as part of Sony’s Corporate Strategy Meeting for investors on May 19, 2020.
Source: Sony Corporate Strategy Meeting, May 19, 2020
“Sony believes that it can expand into new areas such as acceleration of remote solutions for shooting, relaying and editing technologies originally developed in the broadcast business…” stated Kenichiro Yoshido.
As a general rule, if a CEO of a large public company discusses a technology trend with investors, then any subsequent investments made in pursuit of that technology trend are strategic.
On August 4, 2020, during the presentation of Sony’s financial results for quarter ending June 30, 2020 the following bullet point appears on the slide discussing business developments for the Electronic Products & Solutions (i.e. the $18 billion division mentioned above):
“Promote the evolution of the business by developing products and services that enable reality, real-time and remote activity.”
The language in the bullet is nearly identical to the terms quoted (included above) in the press release announcing the acquisition of Nevion.
Later, on August 21, 2020 Sony held a business briefing with investors for the Electronic Products & Solutions division. There are several relevant excerpts (the quotes are adapted from the English transcript).
The first excerpt (below) is in the context of the COVID-19 impact to broadcast content production. It highlights a business model shift consistent with Sony’s public comments around the Nevion acquisition.
“Going forward, we believe that rather than just one-off sales of hardware, remote content production and service-providing business will present us with more occasions to generate recurring revenue or provide full solutions.”
During the same briefing and in response to a follow up question about business models, the following statement is provided by Sony management.
“In the broadcasting space, we have invested in one overseas company, and we intend to continue to engage in trials and expand our investments in areas that show promise.”
It would seem plausible to attribute the ‘overseas’ company as Nevion. The remainder of statement might suggest Sony will continue to make additional investments in the segment.
Nevion’s Journey to a Strategic Exit
After the July 2019 Sony investment, Nevion’s equity ownership was distributed as 45% to Sony, 46.5% to Herkules Capital, and 8.5% to Selvaag Invest. Both Herkules and Selvaag Invest are private equity firms based in Norway. Selvaag’s original investment in Nevion dates to 2005. Herkules, the more significant shareholder, made its initial investment in January 2008. According to its website Herkules prefers an investment holding period of 5 to 7 years. In the case of Nevion the holding period extended to almost 13 years.
It was then a 13-year journey for Herkules to arrive at a strategic exit. The journey included the January 2008 merger of Network Electronics and VGP that created Nevion, the merger with T-VIPS in 2012, and then the Sony minority investment in mid-2019.
Based on Nevion’s regulatory filings, the below chart plots the revenue profile (in both NOK and USD) for the 2008 – 2019 time-period. We added a USD time series for those who are less familiar with movements of the NOK currency.
At the time of the 2019 investment from Sony, Nevion CEO Geir Bryn-Jensen told Finansavisen (Norwegian business newspaper) he expects the company to achieve record revenues in 2019. In terms of NOK, Nevion totaled a 2019 result just shy of its 2017 revenue figure. Looking more broadly at the time series, expressed in US dollars Nevion is smaller than a decade earlier. This is in part attributable to the weakening of the NOK currency versus the US dollar.
From a profitability standpoint, Nevion managed just a lone year of operating profit in the same ten-year period and was unprofitable in each of the two most recent years. Despite the lack of revenue growth or any meaningful level of profitability, Nevion’s management team managed to position itself for a strategic exit to a large industry participant. Again, there are no disclosures on price, but all the rhetoric from Sony (discussed above) indicates it was viewed as a strategic deal.
Let us next expand the discussion to look at the broader category of video transport by considering the last decade of revenue results from Media Links, Nevion, and Net Insight. The combined revenue profile of these three businesses was only a bit more than 4% bigger in US dollar terms in 2019 than eleven years earlier in 2008. Adjusted for M&A transactions there was no growth in aggregate revenues.
In the 2008 -2019 time-period there are 10 year-over-year revenue comparison periods for each of these three businesses. If we take the year-over-year percentage growth figures for each business, forget about the years, and order the revenue growth figures from lowest to highest (left-to-right), then you arrive at the below table. Next, let us grey out the three years disproportionately (positively) impacted by acquisitions. Those years correspond to Net Insight’s purchase of ScheduAll and the two M&A events with Nevion.
Viewed in the above manner, there a total 27 revenue growth figures when we remove the three artificially boosted by M&A activities. The breakdown growth by business is as follows:
- Media Links: 7 down years, 4 up years
- Nevion: 4 down years, 5 up years
- Net Insight: 5 down years, 5 up years
Taken in aggregate there were 16 down years and 11 up years. Our long-winded point is there was negligible organic growth in the segment over the past decade and tremendous cyclicality.
Regardless, Nevion’s management team managed to position the business for a strategic exit to a large industry participant. By all public comments of the acquirer, Nevion was an attractive target because of its technology portfolio (by extension technology investments), its alignment with several top industry trends, and its adjacency to the acquirer’s product set.
To put the main takeaway in plain terms: even within lower growth / choppy market segments there is an opportunity for suppliers to build shareholder value.
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