eOne's growing takeover appeal

Against this backdrop, Entertainment One (ETO) – or eOne – continues to look well positioned for a takeover approach. The group develops, acquires, produces, finances and distributes entertainment content. At last count, its library was worth $2bn.

Family and brands – eOne’s smaller business – is known for its highly popular children’s brands Peppa Pig and PJ Masks. The division’s revenues climbed 29 per cent to £76m during the half-year to September 2018, constituting just under a fifth of the top line (£405m). And a recent trading update showed that sales and underlying cash profits here improved by over a quarter for the year to March 2019.

Film and television – eOne’s larger business – has been hit by the decline of the home entertainment market. And, in the first-half results, management booked £57m of restructuring charges, which included £40m related to content and inventories. That said, management has been actively shifting its film operations away from third-party distribution towards higher-margin own-production work. That looks a sensible plan, especially given the rise of subscription viewing platforms such as Netflix (US:NFLX) and Amazon (US:AMZN) and the upcoming launch of streaming channels from Disney and Apple (US:AAPL). Moreover, this transition looks to be progressing well. In 2018-19, eOne made fewer but more profitable film releases, lifting underlying cash profit margins. Revenue per film rose 44 per cent.

eOne has enhanced its content profile via transactions, including its March 2018 purchase of the remaining stake in independent studio ‘The Mark Gordon Company’ that it didn’t already possess. And earlier this month it announced the £178m acquisition of UK-based Audio Network, a major music publisher for films, TV and adverts.

Both deals were part-funded via share placings. The latest raised £130m, placing the new stock at 439p, a 5.6 per cent discount to eOne’s previous closing price. The shares dipped in response, perhaps also reflecting investors' concerns that the deal is part-funded by a £52m loan and the group's debt is highish and rising – the figure has more than doubled to £433m in the 18 months to end September 2018, but management says it expects net debt to come out at about 1.9 times underlying cash profits in the year just ended.  

Besides, Audio Network offers predictable and recurring cash flows and should add to group earnings in 2019-20. Broker Numis says the deal adds “higher quality, higher-margin, lower-risk earnings”, in line with eOne’s aims.