Description

Thesis  

Entertainment One (“eOne” or “the company”) is a UK listed independent entertainment group with compelling growth drivers and significant strategic value. The stock trades at a material discount to peers despite the recent approach from ITV (2016) and multiple approaches from other strategic buyers including the DHX reverse merger attempt (2008) and rumors of interest from Disney and Viacom in 2011. The Board recently informed ITV Plc (“ITV”) that their 236 pence per share offer was insufficient - “fundamentally undervalued”. This makes sense, based on the intrinsic value of the business derived from multiples, content library value and growth opportunities.

On current consensus expectations for calendar 2017 / 2018, eOne trades at:  9.4x / 8.3x P/E and 6.9x / 6.1x EBITDA.

The upside case is that the company is successful in its plan to drive EBITDA to more than GBP 200mmover the next few years (versus last year GBP 129mm), which could see the shares close to double current levels. There is also an activist involved who could potentially bring forward equity value creation if successful in driving a formal process for the sale of the business – which could lead to a highly contested auction.

Downside appears minimal given the value of the content library alone estimated to be $1.5bn, as well as the strategic value in the business as evidenced by ITV’s recent approach, the interest of other strategics in the past as well as current low multiples versus peers.

Business Description

eOne source, select and sell entertainment content rights across all media platforms globally.

Television Division

eOne is one of the major independent producers of television content commissioned primarily by the North American broadcast networks. The content is then sold through eOne’s in house television sales team to broadcasters globally and leading digital platforms.  Last year, eOne acquired/produced 998 hours of new programing and sold to over 500 broadcasters in 150 territories.   Television accounted for 28% of revenue, 29% of EBITDA and 47% of investment last year.

Family Division

Family focus on building a portfolio of children’s properties spearheaded by Peppa Pig, which is one of the world’s leading pre-school brands and a key growth driver for the group. In addition to Peppa, eOne own a number of launched and developing children’s brands including Disney’s PJ Masks.  There are 847 live licensing and merchandising contracts across the brand portfolio and last year over 500 broadcast and licensing merchandising contracts were signed. Family was 8% of revenue, 32% of EBITDA and 3% of investment last year.

Film Division

eOne is a market leader in film distribution in Canada, UK, Spain, Australia/New Zealand and Benelux.  Through eOne Productions, eOne use their scale to produce a small number of titles each year.  Film was 64% of revenue, 39% of EBITDA and 50% of investment last year.  

Company History

eOne was founded in 1973 as the music distributor Records on Wheels.  By 2003 they expanded into home entertainment distribution, and international film and production through acquisitions including Koch Entertainment and Seville Pictures. In 2007 eOne accepted a takeover offer by Marwyn Investment Management to fund its expansion. Subsequent acquisitions included Contender Entertainment, RCV Entertainment, Blueprint, Barna-Alper and Oasis International.  In 2012 eOne bought Alliance Films in Canada, and became a member of the FTSE 250.

2015 was a big year for the company. They made important strategic progress recently with good organic growth as well as key strategic acquisitions in Television; the ramp up of activity in The Mark Gordon Company; the acquisition of a controlling stake in Astley Baker Davies Limited, the creator of Peppa Pig; expanded film relationships with Amblin Partners and strategic investment in Sierra Pictures; and long term funding put in place during 2015 to support the growth strategy.

The rights issue and debt issuance in 2015 along with underperformance in the Film division put material pressure on the shares, leading the shares to decline from over 320 pence to under 150 pence.  Canada Pension Plan acquired a major shareholding in the company, making it the largest shareholder next to Capital Group.

At recent results (11/21/2016) the company announced that the CFO Giles Willits would be leaving the company which lead to a sell-off in the shares along with weaker than expected first half profitability in film. Importantly, the company has confirmed full year expectations with “high visibility” in both TV (contracted revenues) and Film (strong 2H line-up, and major investment took place in 1H that will drive 2H growth), and that the CFO’s departure was on good terms.

Growth Drivers  

Big picture, the strategic priorities of eOne are to (i) enhance content rights by developing deeper partnerships with top content producers and talent; and (ii) improve global sales by building the world’s leading independent content rights sales business.

There are 6 main levers:

1.       TV – Building a bigger global TV business.

2.       TV – Maximizing eOne’s global sales network.

3.       Family – Make Peppa the most loved pre-school brand. USA, China, South Korea and Japan are key areas of future geographic growth.

4.       Family – Develop a portfolio of global family brands.

5.       Film – Create partnerships with premium film makers.

6.       Film – Maximize scale and efficiency in film distrubution.

In the background, there is the broader film/TV market driver:

Strategic Value

Key evidence of strategic value includes:

1.       Recent approach from ITV (2016)  

2.       Strong rumors of interest from Disney and Viacom (2011)

3.       DHX reverse merger attempt (2008)

As mentioned, the Board recently informed ITV that their 236 pence per share offer was insufficient – describing it as “fundamentally undervalued”.

The attention of activist shareholder David Neuhauser at Livermore Partners has been captured. Recent Bloomberg articles suggest that Livermore have claimed a win with the recent departure of CFO, Giles Willits, and that they would like to see more cost cutting and asset sales to prep the company for an eventual takeover.  I don’t think this has a high likelihood of success unless Livermore can convince the two major holders - Capital Group and Canada Pension Plan, who together hold around 40% of eOne’s shares.

Valuation

On current consensus expectations for calendar 2017 and 2018 eOne trades at 9.4x / 8.3x P/E, and 6.9x / 6.1x EBITDA.

Upside case – the company hits targets, and re-rates to SOTP multiple given strategic value

Downside case  – content library value only (punitive)

Comps value – eOne trades at a material discount to peers

Content Library Valuation of $1.5bn+

Risks

1.       Volatility in revenues and profitability of Film business

2.       Execution

3.       Cash conversion

4.       M&A

Catalyst

1.   Growth in earnings and cash flow towards medium term objectives

2.   Multiple expansion to peers / SOTP implied  

    Potential M&A target