Makers of Peppa Pig reject ITV’s £1bn bid
Broadcaster faces having to raise takeover offer for Entertainment One or walk away from deal with Canadian production group
ITV faces pressure to improve on its £1 billion bid for Entertainment One, the production company behind Peppa Pig – the children’s cartoon – after it was dismissed by the group’s board. ITV wants to add eOne to its long list of television production takeovers, as chief executive Adam Crozier seeks to make the company less reliant on the UK’s volatile advertising market, which is facing a dip in the wake of the Brexit vote.
ITV faces pressure to improve on its £1bn bid for Entertainment One (eOne) after it was immediately dismissed by the Peppa Pig maker’s board.
Britain’s biggest commercial broadcaster wants to add eOne to its long list of television production takeovers, as chief executive Adam Crozier seeks to make the company less reliant on the UK’s volatile advertising market, which is facing a downturn in the wake of the EU referendum.
ITV’s 236p-per-share cash offer for its latest target was unanimously spurned just a few hours after it was received, however, with eOne saying it “fundamentally undervalues the company and its prospects”. Investors appeared to agree yesterday and sent the shares up 10pc to close 4p above the offer price at 240p.
It leaves Mr Crozier and ITV’s new chairman, Sir Peter Bazalgette, with a choice of making a significantly higher bid or walking away.
ITV’s interest in eOne has been speculated about for months and its approach was confirmed yesterday morning following a 10pc spike in the shares on Monday as rumours emerged from Canada, where many of its operations are based.
The broadcaster may have finally swooped for a post-referendum bargain, City sources suggested, as eOne makes a large proportion of its £800m sales in foreign currencies and stands to benefit from the weaker pound. ITV highlighted that its proposal represent- ed a 19pc premium on Entertainment One’s share price at the close of trading on Friday, and a 47pc premium to the average in the six months to mid-July.
However, the offer was well short of the expectations of eOne’s major shareholders. They are led by the Canada Pension Plan, which owns a fifth of the company, and bought in last September at 269p per share.
The stock is also well down on its all-time peak of 326p last summer after a rights issue and refinancing unsettled investors concerned by eOne’s history of weak cash generation. Taking into account the rights issue, which funded an increase in Entertainment One’s control of the Peppa Pig franchise, the peak valuation would be around 300p today.
Talk of an ITV takeover of Entertainment One has attracted some scepticism, even on its own board, in part because the company draws most of its revenues from distributing independently made films such as the recent adaptation of Roald Dahl’s BFG. Those revenues are typically low margin and
can be volatile, driven by occasional big hits.
To some, that made Entertainment One a questionable strategic match for ITV. However, Entertainment One has been investing heavily to diversify from distribution into production. Last year, while it accounted for a minority of revenues, the company’s television division, including Peppa Pig, was responsible for around two thirds of underlying earnings.
There was immediate speculation that, if a deal is completed, ITV could seek to offload the film distribution business and hold on to Peppa Pig and eOne’s television production businesses. They include a majority stake in the Mark Gordon Company, the maker of hit US dramas such as Grey’s Anatomy and Ray Donovan.
ITV told investors: “ITV has a clear strategy that, over recent years, has created significant value for shareholders.
“A key part of that strategy is continuing to build a scaled international content and global distribution business, with a focus on US scripted content. ITV believes that the proposed combination with eOne has strong strategic rationale and would further ac- celerate ITV’s rebalancing of the business.”
Entertainment One, originally a music distributor, was built up by its Canadian chief executive, Darren Throop. In a Telegraph interview last year, he complained that the company was undervalued compared with its US media peers by the London stock market and that he wanted to continue building it as an independent film and television player.
Normally, August is known as the “silly season” due to a dearth of news. But the City has been treated to two takeover attempts this week that show not everyone has decamped to the beaches.
Unfortunately, the current terms of the £3.2bn three-way deal between 888 and Rank for William Hill, and ITV’s low-ball approach for Peppa Pig maker Entertainment One could also be filed under “silly”. Both bidders will have to bump their offers significantly if their takeovers are going to be anything more than a brief summer diversion.
Arguably, Entertainment One, which started life as a humble “Records on Wheels” outfit selling vinyl out the back of a van in Ontario, has been rumoured to have been in ITV’s cross hairs for the best part of the year, after reports surfaced in April that the broadcaster had floated the idea with its board.
ITV confirmed yesterday that it had finally stuck its neck out and put a £1bn bid on the table, arguing that it was in keeping with its strategy to build its content and distribution business. However, what ITV failed to mention, when it trumpets the 19pc premium on its 236p-a-share proposal, is that Entertainment One shares were trading at 326p last summer.
The Downton Abbey broadcaster has timed its approach opportunistically following the drag on its target’s shares after investors were left reeling from a rights issue and unexpected refinancing last year. Entertainment One’s investors had hoped the company would finally curtail its acquisition spree and start replenishing its free cash flow, rather than raise extra cash to buy out the other rights-owners of Peppa Pig.
Along with the rest of the market, Entertainment One’s shares were also crushed by Brexit, knocking it from 219p to 154p, but it has since rebounded strongly given its geographically diversified revenue stream. Despite this, the media company, which remains something of a scarcity on the London stock market, has still been reduced to bargain-basement level.
Entertainment One was right to toss out ITV’s approach at this level without too much chin-stroking. The bid clearly undervalues the company, which continues to grow profits and has further lucrative distribution deals on the way, including the forthcoming HBO commissioned series of Sharp Objects, the latest book by best-seller author behind Gone Girl, which already has Oscar-winner Amy Adams on the cast list.
While the growing TV distribution business and Entertainment One’s famous pink piglet might appeal to ITV, a full takeover would also expose it to the volatility of films, which the broadcaster has been at pains to move away from. While film distribution continues to be the biggest revenue driver for Entertainment One, bringing in 64pc of revenues, it is a low-margin business equating to just a third of earnings.
ITV also has a stumbling block when it comes to Entertainment One’s largest investor, the Canadian Pension Plan, which bought 19.9pc last year at a price of 269p a share and is unlikely to want to sell out at a loss, or even at all. Second on the register is staid US investor Capital, which owns a 10pc chunk, which is likely to share a longterm approach. But once you glance past the top 10 shareholders, investor stakes quickly fall below 1pc.
Meanwhile, there is a noisy activist, Livermore Partners, which in January lobbied the board to change its strategy from putting sales growth before profit and debt management. David Neuhauser, fund manager, had threatened to push the board into a sale if it did not adjust its settings.
Yesterday, Mr Neuhauser marvelled at the timing of the bid approach and said his activist fund was still discussing whether to “go big” on its stake which is currently below 1pc. Livermore typically targets companies valued at between £100m and £2bn. The Illinoisbased fund manager is not fond of the current management, while extolling ITV’s Adam Crozier’s strategy – but it still thinks the bidder needs to seriously up its game “closer to 300p would be a fairer price”, Mr Neuhauser told me.
The ball is firmly in ITV’s court. After initially tanking, the shares recovered strongly yesterday to close up, indicating that it might have support for a second tilt. However, investors will be cautious about the company overpaying. Of course, ITV’s interest could flush out other buyers, including the major US film studios such as Sony, Fox and Paramount, who are still scrabbling over content.
But Entertainment One’s Canadian boss Darren Throop has previously complained that the company had long had to play second-fiddle to American rivals. Being swallowed by one might be a step too far.
‘ITV’s interest could flush out other buyers, including the major US film studios’