Setting up for a new growth cycle

Heading into 2020, analysts expected companies to use M&A to improve business; what lessons are still relevant for the post-coronavirus world?
image (1)

Last year saw a trio of Canadian media companies bought by foreign owners. The timing is no coincidence, and the value of these deals had analysts anticipating more mergers and acquisitions in coming months – at least until the coronavirus-led economic meltdown.

The current uncertainty is expected to put the brakes on M&As that may have been in the works. By the same token, when the dust settles, some companies may find consolidation their best recourse. The challenge for would-be sellers, then, becomes how to land the best buyer and price, and, for those who want to build value and grow organically, these pre-COVID-19 transactions provide valuable insights.

In August, U.S. toy giant Hasbro announced it was acquiring mini-major eOne for US$4 billion. The deal closed in late December, the same month U.K.-based Ashtead Group took over production equipment rental house William F. White International (Whites) for around C$260 million.

Six days after that, global theatre operator Cineworld Group, also out of the U.K., made a C$2.8 billion offer for Cineplex, Canada’s dominant movie exhibitor which had taken a hit from growing content consumption on viewers’ personal devices and high-profile feature films launching on SVOD platforms. In the wake of the health crisis, Cineplex has closed its 165 theatres, and as consumers hunker down at home, Universal Pictures has become the first Hollywood studio to make its new releases available on demand.

Amidst all this, Cineplex stock has tanked. Cineworld has maintained its desire to close the deal, although certain stipulations must be met, including a threshold of Cineplex debt.  Approval is also required from the Competition Bureau and the Investment Canada Act. Further complicating matters, Cineplex shareholder Bluebell Capital Partners has reportedly asked Canadian Heritage to block the deal out of fear for the combined companies’ prospects. On Friday (March 20), Cineworld laid off more than 400 staff, after closing all cinemas in the UK and Ireland three days prior. It had warned it may breach its debt covenants in three months.

This spate of activity can be attributed to the launch of new streaming services and their insatiable hunger for content, which south of the border has seen AT&T take over Time Warner, Disney acquire key assets of 21st Century Fox, and what’s left of the Fox Corporation buying AVOD Tubi.

“This production explosion is redefining the industry,” says entertainment lawyer Arthur Evrensel, founding partner of Michael, Evrensel & Pawar, who has clients selling or looking to sell. “Everything is moving faster. Global entertainment companies need scale and scope to compete. It’s about attracting and retaining subscribers, and the way to do that is to find desirable projects, produce and launch them.”

The Hasbro-eOne deal in particular might initiate a domino effect, with other content companies hoping for such a favorable evaluation. The deal values eOne at more than 15 times its fiscal 2019 EBITDA (C$344 million), which, according to market analysts, compares to single-digit multiples for content companies of comparable size.

The premium cost speaks to the projected value of evergreen kids brands, and eOne brings a monster in Peppa Pig. The character’s eponymous animated program is broadcast in 180 territories and is phenomenally popular in China. The franchise has more than 1,000 licensees worldwide, with spinoff products including books, movies, live shows, music releases and theme parks. Retail sales in 2019 were up 4% to US$1.35 billion.

While Hasbro also gets the valuable PJ Masks and Ricky Zoom animated properties, Peppa Pig is seen as having driven the transaction. “Peppa Pig was the asset within the eOne mix that was much desired by a number of players in the marketplace,” says a media analyst who requested anonymity. “The question was always would eOne sell Peppa Pig separately or within the context of the entire company, which ultimately is what transpired with Hasbro paying an attractive price for the entire platform specifically to get its hands on Peppa Pig.”

eOne has set the standard for building company value prior to sale. It took control of Peppa Pig in 2015 by acquiring a 70% stake in London animation studio Astley Baker Davies (ABD) for C$282 million, just ahead of the program’s launch on Chinese streamers, and proceeded to sign nearly 500 broadcast and licensing and merchandising deals for the property the following year.

It quickly became apparent eOne and its president and CEO Darren Throop were on to a good thing. U.K. broadcaster ITV tried to buy Throop’s company for C$1.76 billion, but in August 2016 eOne rejected the offer, stating it “fundamentally undervalues the company and its prospects.” Time proved eOne right as it received three times that amount three years later.

Although eOne has been active in all manner of production, it’s held to a particular focus in the kids space. “We’ve moved from being production-oriented to ‘Let’s nurture IP,’” John Morayniss, former eOne Television CEO, told Playback after the ITV deal was shut down. “Production is the means and not the endgame in kids and family. It’s about building brands.”

And the company effectively spread the word about the brand-building it was doing. Leading up to the Hasbro deal, it pumped out press releases about toy launches and licensing partnerships around Peppa Pig and PJ Masks, particularly in Asia. Working with topnotch publicists – in this case, the U.K.’s License to PR – went far in telling the story eOne wanted to tell and no doubt delivered strong ROI.

Hasbro did not respond to an interview request.

Growth by acquisition was key to eOne’s strategy since it went public in 2007 and provided several points of interest for buyers. eOne is reportedly assuring partners it will continue producing scripted drama – bolstered by its buy of Grey’s Anatomy producer The Mark Gordon Company – and Hasbro CEO Brian Goldner has expressed excitement about his new roster of music artists – augmented by eOne’s acquisition of Audio Network. If Hasbro wanted to diversify, eOne did much of the work for it.

And the value of eOne’s board of directors can’t be underestimated. It wisely put the brakes on the ITV offer. “A good board does its homework and sells to the right player at the right time at the right price,” says Drew McReynolds, RBC Capital Markets’ managing director, global research, telecommunications and media. “Darren did a remarkable job of evolving the asset mix, and the board had a reasonable sense of what the potential was and they were fortunate to ride that wave of Peppa Pig and other properties they were developing.”

The payoff of hero IP has not been lost on others. Producer, distributor and broadcaster WildBrain (formerly DHX Media), also has grown through acquisitions, including the original WildBrain Entertainment, Cookie Jar and kids stations Family Channel, Family Chrgd, Family Jr. and Télémagino purchased from Astral Media. In May 2017 it picked up 80% of the Peanuts franchise along with Strawberry Shortcake when it purchased Iconix Brand Group’s entertainment division for US$345 million.

But the buy exacerbated WildBrain’s debt, and that October its board of directors initiated a strategic review during which they explored selling the company or divisions or assets, or merging with another party. A corporate restructuring ultimately saw former Marvel Enterprises CEO and DreamWorks Classics founder Eric Ellenbogen installed as CEO and it sold its Halifax animation studio.

WildBrain seemed to be following eOne, a company that nearly bought it in 2008. It expanded its Asian footprint with licensing and streaming deals for properties including Teletubbies and Strawberry Shortcake and signed CAA Global Brand Management Group to boost Peanuts licensing in the region. Debt forced it to sell a 39% share of Peanuts to Sony Music Entertainment. The property paid off with a commission for Snoopy in Space, a series for Apple TV+’s November 1, 2019 launch.

Following the review, WildBrain stated it had received interest but decided to continue moving forward confident in “the strength of our asset portfolio.” It stated it would grow through leveraging its IP for programs for major streaming services and investing in its WildBrain network of kids videos on YouTube and AVOD platforms, later underlining that priority by adopting the WildBrain moniker company-wide.

“There is an inevitability to the sale of WildBrain,” says Adam Shine, managing director, equity research, telecom, cable and media analyst at National Bank Financial. “There’s always debate as to the value of their large, independent children’s-skewing library. Peanuts is at the top of the value chain. The question is whether the company is prepared to continue building up the library as the new CEO is talking about or will there be preparations over the next 12 to 18 months to divest of the library.”

WildBrain declined to be interviewed for this story.

While every company wants to sell from a position of strength, some, such as Kew Media Group, didn’t have that advantage. Kew got big very quickly by buying various companies, including six announced in February 2017, eight months after its IPO: Content Media Corporation (CMC), holders of a significant film and TV library, and Canadian producers Frantic Films, Architect Films, Bristow Global Media (BGM), Media Headquarters Film & Television, and Our House Media. Later that year it acquired distributor TCB Media Rights and prodco Sienna Films.

But Kew suffered declining revenues and bad press earlier this year when accounting firm Grant Thornton LLP withdrew audit reports on Kew financial filings that were deemed unreliable. Kew announced a strategic review last December, contemplating a sale, merger or divestiture. Its stock plummeted from $7.38 to $0.64 (before the impact of the Coronavirus) and it was delisted from the TSX. Frantic Films CEO Jamie Brown bought back his company, Montreal’s Datsit Sphère bought BGM and Sienna, and other subsidiaries were sold or are looking to be sold. Kew has been placed into receivership.

The company was perhaps victim to its own ambition.

“It’s a great idea to cobble together a bunch of companies as WildBrain and Kew did, but you have to sustain that quick growth with revenues, and they didn’t generate enough to cover their growing overhead,” says Evrensel. “They weren’t flawed in their business plan, but came up short on execution. Frantic and Sienna are good producers, but making them part of one company rowing in the same direction is not easy. Things move so quickly in this new landscape and Kew just didn’t have the time to integrate them properly.”

Cineplex’s situation is unique, but its sale speaks to the pressures of being publicly traded. The exhibitor saw the box office threat from the likes of Netflix which is not just sapping audiences, but challenging the traditional theatrical distribution model and buying directly from film festivals. Cineplex, which declined to be interviewed for this story, improved the theatrical experience with its VIP and UltraAVX cinemas and diversified into digital signage, food and entertainment. Of course, it did not foresee the outbreak of COVID-19 and the closing of its theatre doors.

It appeared to be on the right track with 2019 revenues up 3.3% to $1.67 billion despite a 4.2% dip in theatre attendance. The market, however, was not convinced.

Cineplex shares, which reached nearly $54 in 2017, sunk to $22.36 by November 2019, and to under $9 by March 18. Many investors have instead banked on Netflix, with shares trading at nearly US$292 in November and up 8% by March, while most other companies’ stocks have plummeted.

“For the Cineplex board there was still an option to live another day as a public company, stay the course and grind through it,” says RBC Capital Markets’ McReynolds, referring to the exhibitor’s decision to sell to Cineworld. “There wasn’t a balance sheet issue, and I don’t think they foresaw a cliff in box office. What it boils down to is the fiduciary duty to maximize value for shareholders. That feeds into, ‘We still think we’re a growth company, but are our investors going to stick around and ride this out?’”

Ultimately it was Cineworld that gave a vote of confidence in December, buying the exhibitor at $34 per share, a premium over then market value of around $24. Cineworld had its own solution to combat SVODs: subscriptions to theatres. It was expected to bring its Unlimited program to Canada, which allows moviegoers to see all the movies they want for a monthly fee. A week ago, Cineworld acknowledged a worst-case scenario in which it could go out of business, and that was before it closed its theatres in the U.K. and Ireland due to COVID-19. In addition to the staff layoffs, Cineworld announced is postponing capital spending.

In the case of Whites, a private company, the only shareholder co-chair and outgoing CEO Paul Bronfman had to appease was himself, and he says his company operated normally in the lead-up to the sale. “Some companies would prep with cutbacks in expenses and capital expenditure, but I didn’t do any of that,” says Bronfman, who founded parent company Comweb in 1988. “We went about our business and spent on equipment, technology and studios as we would in any given year.”

Service companies have had to ramp up capacity to keep pace with demand. According to the CMPA’s Profile 2018, in 2017-18 B.C. saw a record $3.6 billion in film and TV production, while Ontario saw $2.9 billion, near an historic high. Whites has facilities in both provinces and Bronfman says sales have doubled in the past four years as the company has serviced projects including The Twilight Zone for CBS All Access and Most Dangerous Game for the Quibi platform that launches in April.

“I was finding a buyer because keeping control would have limited opportunities for growth,” Bronfman explains. “I could not manage the size of the company anymore.” Now, however, many productions in both provinces have ceased shooting and work could nearly completely wind down given border closings and travel restrictions.

To find the right buyer, Bronfman hired Lazard Middle Market, advisors specializing in M&As, which stoked interest by releasing a teaser document announcing the sale of a major rental house without mentioning Whites by name. But interested parties figured it out and the exercise yielded eight finalists, which were whittled down to four and then two. Ashtead, which reported around C$7.7 billion in revenues in 2019, emerged victorious although Bronfman said it didn’t have the highest bid.

“It was based on their culture and approach of putting people first,” he elaborates. “They are strategic and have incredible plans for this company.” Sure enough, in late February Whites announced a second studio in Toronto, to be called Whites Studios Cantay. It was set to open in early 2021.

As part of its vendor due diligence, Whites hired Deloitte to produce a quality of earnings report, which breaks down which earnings are cash or noncash and recurring or nonrecurring – and presented it to Ashtead. With everybody satisfied, the $260 million deal was struck. “I couldn’t be happier,” Bronfman says. “The [price] was way beyond what I ever thought I would get for the company.”

And so other shops will look to strike gold – or perhaps just stay afloat – in this Golden Age of Television. Analysts’ speculative scenarios before the Coronavirus outbreak saw entrepreneurial Boat Rocker Media doing either more buying or selling, Shaftesbury selling, Corus Entertainment going private or selling the broadcast assets it acquired from Shaw Media, and even BCE spinning off Bell Media. All we know at this point is anything can happen.

“Certainly eOne and Cineplex raised eyebrows in terms of the M&A playbook in the Canadian space,” McReynolds says. “We’ll see what happens.”

This story originally appeared in the Spring 2020 issue of Playback magazine, but the content has been updated due to the COVID-19 pandemic. In the magazine, the story ran under the headline: “Striking gold in the golden age of TV”