THE GENESIS OF AN EMPIRE

Back in ’73, when Jim Croce was figuring out how to save time in a bottle, a small music retailer named Records on Wheels was revving up its engine for the very first time. Few might have guessed that one day the humble record shop would become a mini-major – Entertainment One – with a powerhouse management group and assets in Canada, the U.K., the U.S. and the Benelux region.

Yet that little upstart retailer followed a path of slow organic growth for three decades before Darren Throop became ROW’s president and CEO; since then he has quietly led the company he knows so well to become what is now a global entertainment player with gross annual revenues of $577.1 million (fiscal 2007/08).

‘We’re creating the major alternative,’ Throop said of E1’s strategic growth during a recent interview. ‘We’re looking to expand our presence across the globe and to become an alternative to the studios.’

When Throop became ROW’s top gun in 2003, the bulk of its business was headquartered in a warehouse in Brampton, ON (one of four the company owns in Canada and the U.S.), where approximately 60,000 CDs and DVDs were packaged and shipped each day to retail and web customers. (Still today, more than half E1’s revenues rest on this side of the distribution business.)

Throop promptly took the company through a series of rapid-fire acquisitions in its core businesses – buying rights to BBC series, pro wrestling and other specialized content – establishing a pattern that would become a trademark quality. However, it was the strategic corporate growth in ’07 and ’08 that positioned E1 as a new player in the motion picture industry.

In March ’07, Throop engineered the takeover of Entertainment One by Marwyn Investment Management. The London-based hedge fund completed its $168-million acquisition and subsequently took E1 off the Toronto Stock Exchange and refloated it on London’s Alternative Investment Market (AIM), raising approximately £80 million (worth $157 million at that time) in an IPO to pay for the acquisition and fund expansion.

E1 will likely be back on the TSX in 2009, thanks to its clever reverse takeover deal with DHX Media (also listed on the TSX), when that deal is approved by shareholders (expected in January ’09).

Yet in between the stock market rallies, E1 went on a shopping spree, buying London-based Contender Entertainment and Montreal-based Seville Entertainment – securing distribution bases in both the U.K. and Canada – as its warm-up act.

The brains behind this push (and more) come in part from Throop’s right arm, Patrice Théroux, president of E1’s burgeoning Filmed Entertainment division (see story, p. 22). And Throop is the first to cite Théroux and the rest of the E1 senior management team – which also includes distribution president Terry Stevens and Koch Entertainment CEO Michael Koch – to explain his recent success.

‘I do leverage the people that I’ve had the fortune of being surrounded by,’ Throop says.

For his part, Théroux says Throop is someone who knows the entertainment business through and through, and only needed expertise to expand into film and TV.

‘Often guys have a general view of the business, but [Throop’s] very involved in the running of his business. He’s done it all – retailing [and] wholesaling directly,’ he says.

Théroux also notes that Throop witnessed the slow death rattle of the local record store and moved to adapt E1 to stave off extinction, building an upside in digital delivery – a foresight that he figures will serve E1 well during today’s turbulent economic climate.

‘It’s music where [Throop] had adopted a rational strategy in the face of an industry that was facing great challenge,’ Théroux explains. ‘He never spent big dollars on big-name artists, but played a controlled game with niche assets.’

Now Throop wants E1 to accomplish a similar coup with filmed entertainment – whether in film, TV, VOD, IPTV, Blu-ray, online video or music and film downloads.

‘I’m not reinventing the wheel,’ Throop says of E1’s dazzling array of acquisitions through its burgeoning Filmed Entertainment division.

In that same ’07 shopping spree, E1 also snapped up Benelux distributor RCV Entertainment. And while the acquisition of a Canadian distributor and British TV content provider were an obvious fit with the ‘alternative studio’ mandate, it was less obvious why E1 would forge into a region that includes Belgium, the Netherlands and Luxembourg.

‘RCV was a great acquisition for us – completely on strategy,’ says Throop. ‘They are the market leader in Benelux, where Hollywood content resonates extremely well… RCV gives us access to several key markets. It helps complement our strength in the U.K. and gives us a significant footprint in Europe.’

In June ’08, Théroux continued E1’s penetration into Canada’s own filmed entertainment industry when the company paid around $51 million in cash and stock for veteran Canadian TV production companies Barna-Alper Productions and Blueprint Entertainment as well distributors Maximum Films, Maximum Films International and Oasis International (the Toronto-based distributor that licenses product to around 500 broadcasters in 150 markets).

Throop readily points to E1’s expanding brain trust – brought about by these acquisitions – as part of the company’s most valuable assets.

The Filmed Entertainment division is led by Théroux (see story, p. 22) and Blueprint’s John Morayniss (see story, p. 24) as well as Laszlo Barna of Barna-Alper (see story, p. 27) and Oasis’ Peter Emerson (see story, p 26). And if the DHX deal is approved, adding to the powerhouse management team will be Decode Entertainment executives Steven DeNure and Beth Stevenson.

‘I can’t underscore the management enough,’ Throop insists. ‘They’ve brought a more dynamic focus.’

Meanwhile, in August ’08, E1 quietly secured a new four-year $150-million line of credit from a consortium led by J.P. Morgan, although the company is not disclosing how much of that is left.

The final coup of the year is E1’s reverse takeover deal with Michael Donovan’s DHX Media for around $68 million.

DHX owns Halifax Film, Vancouver’s Studio B Productions, and Decode Entertainment – the jewel in the crown – with its proverbial evergreen library of children’s content. That deal will bring the company’s film library to around 3,700 titles and over 4,500 hours of TV programming.

But despite the growth in the movie biz, Throop is still well aware that it is E1’s older cash-generating assets in home entertainment that keep his investors and bankers onside while he grows the filmed entertainment business.

In reality, E1 is essentially two businesses. The music and home entertainment side generates around 80% of revenue by exploiting a DVD library of over 30,000 titles and a CD catalogue with 12,000 titles. The company also distributes DVDs for Universal Home Video and Fox Studios in the Canadian market.

‘Without these businesses, we could not continue to grow,’ says Throop. ‘These underlying structural businesses drive the solid results.’

Yet given the dire future of CD and DVD sales in retail stores, and the market opportunities spawned by the Internet and other new media, E1’s ‘content-led’ growth strategy has led to a future in which it will increasingly own and exploit filmed entertainment content across a range of digital platforms and around the world.

E1 currently derives only 20% of its revenue from filmed entertainment, but that business is expected to balloon in future years as the company builds and exploits its library of film and TV product by selling its catalogue for TV broadcasts and video-on-demand, as well as DVD and online distribution.

If anything, Throop claims no special powers with his strategy to leverage E1’s music and home entertainment assets to deliver filmed entertainment to a wider international market.

But try telling Throop that growth for the global entertainment business will slow on the tip of a global economic downturn. ‘We see new opportunities in the headwinds,’ he argues, ever the cautious optimist.

With files from Suzan Ayscough