Intellectual Property Rights

Parents of young children will be more than familiar with 'brands' like Bob the Builder, Postman Pat, Fireman Sam and Harry Potter. The more cynical will also be conscious that there is an industry out there making a lot of money out of these trademarks. As an indication, 2 million Bob the Builder books were sold in the UK in the year to October 2002 and 3.5 million videos sold in the US.

At the core of these fictional figures are the owners of the intellectual property rights. These companies control the exploitation of the characters, putting together the deals that result in our shops being flooded with branded toys, books and videos. Demand for these products is engendered by weekday morning and afternoon as well as Saturday morning TV shows.

Just as technology IP companies take royalties on the use of their patents, so character and rights owning companies can take a cut of all products sold and programmes made.

Current market conditions are difficult, but as Baird analyst Richard Cecil points out, with most of these companies' costs being fixed, 'revenues drop straight to the bottom line' once a certain level of sales is reached. A recovery in the media sector should therefore herald big profits hikes across the board. There is also constant takeover speculation in the arena to add a bit of spice to the mix.

Hitting the right notes

Although Bloomsbury Publishing attracts a great deal of market attention, mostly due to its ownership of the rights to Harry Potter books, HIT Entertainment is probably the best example of Britain's success in the media rights arena. It owns the worldwide rights to Bob the Builder – the immensely popular (and unusually good-natured) construction worker that it developed itself through subsidiary HOT Animation in Manchester. The company's history has, in Investec analyst Malcolm Morgan's words, seen it go from being 'a start-up to a leading international owner of leading children's brands'.

But HIT has a lot more strings to its bow besides Bob (which Arbuthnot analyst Simon Lapthorne reckons 'is close to maturity'). Rubbadubbers (soon to air on the BBC) and Pingu, are amongst a raft of other 'pre-school' rights. Through the £140 million acquisition of Gullane Entertainment last year, it took control of Thomas the Tank Engine.

City analysts are almost universally positive about the company – and especially about its management team, with Baird's Cecil calling Rob Lawes and his team 'marketing geniuses'.

Market forecasts have the group making around £39 million in pre-tax profits with 16.9p of earnings per share this year. This means the shares, at 193p, trade on a prospective p/e of just under 12. This looks undemanding, especially given Cecil's comment that 'someone in the US could easily pay 350p' in a takeover bid.

Noddy up for sale...at a price

However, bid talk is rather more prescient at Aim-listed Chorion, a company that has consistently failed to hit expectations since demerging its bar-nightclub division Urbium a year ago.

It owns the rights to Agatha Christie's Poirot and Miss Marple, with the former's ITV shows (which it co-produces) forming an important part of its revenues. Its children's rights division owns the rights to Enid Blyton's portfolio of works, with Noddy currently being the most important.

But its relative difficulties have brought the corporate vultures in to circle, with Entertainment Rights (the owner of Postman Pat and Basil Brush) tentatively mooting its interest late last year, before being beaten off.

Chorion has since confirmed that it intends to sell its children's division, setting a target price of £30 million for prospective buyers. But Cecil (who advises Entertainment Rights) says that 'in my opinion they won't get anywhere near that'. The market obviously agrees with him given that it values the whole group at only £22.6 million. Nevertheless, Investec's Morgan writes that 'these properties would be of interest to HIT at the right price', too, a telling comment given that his bank is joint house broker to the prospective buyer. All in all, it offers an intriguing speculative situation for brave investors.

For slightly different reasons, so is that of Maverick Entertainment, a company that is further down the food chain, having registered a first, small profit in its interim period (compared to Chorion's £1.2 million pre-tax return for the same period). But it recently helped to launch a range of products based on its 'Snailsbury Tails' TV series, one that seems to have been a big hit with kids in Australia and the UK. Cash is tight, but the group is showing signs that it could be a winner over the next few years.