Entertainment One on the takeover trail

Peppa Pig producer Entertainment One is lining up takeovers on the Continent after turning a £31 million annual loss into £6.9 million pre-tax profits. Darren Throop, Entertainment One’s Canadian chief executive officer, says the company, whose move to the Full List is imminent, has its eyes on ‘some great acquisition targets in East and West Europe’.

Currently based in the Cayman Islands and strongly backed by fellow Cayman-domiciled group Marwyn Neptune Fund, the internationally focused company chalked up its first profit since floating on AIM three years ago on turnover 30 per cent ahead to £444.2 million in the year to March, in an austere economic climate, helped by sterling’s weakness against the US dollar.

According to Throop, the group has been performing in line with its 2007 flotation strategy of investing in entertainment content and distribution to the tune of £27 million a year in the UK, North America, continental Europe and elsewhere and is now reaping the rewards. He is re-domiciling Entertainment One in Canada with the switch to the full London Stock Exchange.

Picking potential winners and spreading risk by geographical reach and involvement in 123 films and 213 half-hour TV shows are the main planks of Entertainment One’s policy, with a key buying and development team targeting chosen markets ‘a year before moving’ and avoiding the ‘studio’ model with a conservatively spread range of investments. The company does produce Peppa Pig, the notably popular television series for children, but in films, the model is to acquire content and distribution.

Entertainment One’s stated aim is to grow the number of films it distributes by enhancing relationships with current production partners as well as expanding the list of independent producers from which it acquires film rights. While exploiting its established capabilities in existing markets, it is seeking to expand its distribution infrastructure across a range of territories.

Throop says the company has been achieving growth in all its areas of operation, having carved out a role as number one or two distributor in each of its ‘core’ territories. Last year, Entertainment One expanded its ‘footprint’ into Australia, New Zealand and France. In films, the New Moon installment of The Twilight Saga delivered a record-breaking box office performance on its opening weekend, and other releases included The Imaginarium of Doctor Parnassus and Astro Boy.

Continuing investment in content rights strengthened the library of Entertainment One, whose valuation rose 27 per cent to $220 million (£152.5 million). The company’s TV side – Peppa Pig, the ‘number one girls’ pre-school property in the UK’ – generated £100 million of retail sales through merchandising and licensing deals, while new network series included Rookie Blue and The Bridge.

Whatever the individual hits, Throop insists that Entertainment One’s diverse investments shield it from over-dependence on one or two blockbusters. ‘With a large portfolio of releases each year, the company manages the risk associated with any one title.’

He says the company is looking forward to the growth of digital technology and other new developments in its fields: ‘We see a tremendous advance.’

Digital already provides a growing part of Entertainment One’s business, providing £20 million in revenues in the
last financial year. The company says it has enhanced its service infrastructure in this area and signed its first multi-territory independent film distributor deal with iTunes.

In March, Entertainment One, which ended its financial year with £40 million headroom on banking facilities of £122 million, raised £10.3 million at 53p from the market to buy back its convertible debt for a discounted £9 million and reduced year-end net debt 21 per cent to £63.2 million. Throop says that Marwyn, which has a 46 per cent holding, remains staunchly supportive of the company’s strategy.

Analysts see pre-tax profits increasing substantially this financial year to £30.7 million, with £34 million or more on the cards for 2011/12. The shares have already risen from 22.75p to 65p over the past 12 months, but existing momentum should provide scope for further growth.