Buy Entertainment One, before it's gone

Entertainment One (ETO) – or eOne – therefore looks ripe for a takeover offer. In March 2017, its library of content was valued at $1.7bn (£1.3bn) and this is expected to have risen by the time the group announces its full-year results. In Peppa Pig and PJ Masks, eOne boasts two incredibly popular children’s television programmes and its acquisition of the Mark Gordon Company means it produces a plethora of big shows for the small screen. More importantly, the group is now prioritising investment in original films and television content, above those acquired from other companies. In the first half of the current financial year, original content absorbed two-thirds of the £230m production investment and management has cut its targeted annual spend in acquired film from £150m to £130m.

eOne’s shares may have already been boosted by the recent wave of takeover speculation but it is certainly not out of the price range of deep-pocketed media peers, particularly in the US. The group trades on a forward enterprise value to adjusted cash profit multiple of 8.9 times, which is well below the 11.3 times multiple telecoms group AT&T has offered media producer Time Warner, or the 9.2 times valuation Disney’s bid has placed on 21st Century Fox. Moreover, eOne’s content library has roughly the same valuation as the entire company’s market capitalisation.

And there is certainly not a shortage of potential buyers. Comcast, Verizon and Sony all revealed their enthusiasm for expansion into the media industry when they attempted to buy Fox. Tech giants Amazon, Apple and Facebook have begun to bulk up their TV divisions by employing well-known producers. But perhaps the most obvious buyer would be Netflix, which is expected to be hurt by the Disney/Fox merger. Disney has already said it is going to pull its films off the platform in 2018 and if it takes Fox’s programmes as well, Netflix could lose almost a fifth of its most popular content. Therefore, buying its own library of shows and a high-quality production company could be a very sensible move.

In the UK, eOne is a former quarry of ITV (ITV). That merger came unstuck due to the target’s Canadian heritage. The group receives tax credits for its investment in Canada, which provide a vital source of funding for its film division. A bidder would need to keep the Canadian domicile if it was to retain the tax credits.

Aside from its content, there’s a lot for potential bidders to like about eOne. Between 2013 and 2017, the group reported compound annual revenue growth of11 per cent, while adjusted cash profit leapt from £63m to £160m. A considerable bulk of the recent expansion has come from the high-margin family division (17 per cent of revenue and 74 per cent of adjusted cash profit) which is made up of the Peppa Pig and PJ Masks franchises. The former has recently taken off in Asia – which helped send half-year revenue up 18 per cent to £37.4m – but is fast being caught up by PJ Masks, which reported a 600 per cent increase in revenue to £22.3m in the first half.

The two remaining divisions – film and television – generate impressive revenue, but due to poor margins in TV and the loss-making film division, together only contributed 35 per cent of overall adjusted cash profit in the first half. But the transition of film and TV distribution from physical to digital format is on track to save £10m in the current financial year and the merger of the two divisions is expected to generate a further £8m of savings before 2020. Higher margins and an improvement in revenue due to the upcoming release of big titles for both the big and small screen means broker JPMorgan expects adjusted cash profit in the combined TV and film division to grow from £110m to £127m between 2018 and 2020.