Entertainment One — Update 24 March 2016

Entertainment One — Update 24 March 2016

Entertainment One

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Entertainment One

Renegade 83 bolsters reality TV production

Acquisition

Media

24 March 2016

Price

154p

Market cap

£676m

Adjusted net debt (£m) at December 2015, excluding production finance

209

Shares in issue

333.2m

Free float

68%

Code

ETO

Primary exchange

LSE (FTSE 250)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

17.1

(5.3)

(41.0)

Rel (local)

13.9

(6.3)

(34.3)

52-week high/low

372.1p

130.00p

Business description

Entertainment One is a leading international entertainment company that sources, selects and sells films and television content. Its library contains over 40,000 film and TV titles, 4,500 half-hours of TV programming and 45,000 music tracks.

Next events

FY16 results

May 2016

Analysts

Bridie Barrett

+44 (0)20 3077 5757

Jane Anscombe

+44 (0)20 3077 5740

Entertainment One is a research client of Edison Investment Research Limited

Entertainment One’s (eOne) acquisition of Renegade Entertainment, a leading producer of reality TV shows, is in line with its strategy to partner with the best creators in the industry. As well as complementing its TV production capabilities and relationships, eOne will capture the global distribution rights on new content. The $23m price for a controlling 65% interest looks sensible and, utilising some of the remaining proceeds of the FY15 rights issue, should be 2% earnings accretive in its first year.

Year
end

Revenue
(£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

823.0

92.8

78.4

18.4

1.0

8.4

0.7

03/15

785.8

107.3

88.8

20.8

1.1

7.4

0.7

03/16e

815.0

129.5

104.0

19.4

1.2

7.9

0.8

03/17e

939.7

154.1

123.7

19.5

1.3

7.9

0.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Renegade 83 – reality television

eOne has acquired for an initial cash payment of $23m a 65% interest in Renegade Entertainment LLC (trade name ‘Renegade 83’), an LA-based creator of reality television programming. Hit shows include Naked and Afraid, Naked and Afraid XL, Fit to Fat and 4400 among many others, and it has relationships with over 30 US networks and broadcasters. The co-founders, and sellers, will continue to run the company as a separate division within eOne. An adjustment mechanism is in place that could result in eOne increasing (or reducing) this price subject to the company’s performance in the coming year. A put/call mechanism is also in place, enabling eOne to acquire the remaining interest after five years.

On strategy and earnings accretive

Renegade 83 adds to eOne’s existing in house and recently acquired reality television creative capabilities and further deepens its relationships with North American networks and broadcasters. By securing at the same time exclusive global distribution rights on new content created, eOne is also adding to its future catalogue and wider distribution capabilities. The acquisition is funded using proceeds from last year’s rights issue, and should be earnings accretive from the first year. We increase our FY17 and FY18 EPS estimates by approximately 2%.

Valuation: Shares look good value

The 6.9x historic EBITDA multiple paid for Renegade is reasonable in the context of deals done in the sector and the adjustment mechanism in place should ensure a fair final price. The acquisition is in line with the group’s strategy to partner with creative talent and is another step in the right direction to double the group’s size (in terms of EBITDA by 2020). We also support the incremental steps taken over the last two years rebalancing the group towards the higher-growth TV and family segments. On a 7.9x FY17e P/E, and ahead of what we expect to be a better operational year for eOne, the shares look good value.

Renegade 83 acquisition

Renegade 83: Leading US reality TV entertainment

Co-founded in 1994 by David Garfinkle and Jay Renfroe, Renegade 83 is based in Los Angeles. The group has grown steadily to generate revenues of $35.1m, EBITDA of $5.2m and net profit of $2.9m in FY15. Hit shows include Naked and Afraid, Naked and Afraid XL, Fit to Fat and 4400 among many others, and it has relationships with approximately 30 broadcasters including Discovery, Fox, NBC, True TV, Bravo and CBS.

Deal structure: Cash price, one-year earn out

eOne has paid an initial $23m in cash for a 65% interest in the group, which implies a historical EV/EBITDA multiple of 6.9x. An upwards or downwards revision to this will be paid (or refunded) subject to Renegade’s performance over the coming year. After a five-year period, a put-call option arrangement can be triggered over the remaining 35% interest. The founders will remain at the company under long-term contract agreement, and continue to participate in the remaining 35% share of the company.

Deal rationale: Partnering with the best, broadening the portfolio

The acquisition is entirely consistent with eOne’s strategy to “partner with the best creative talent” in order to secure access to premium content, which it can then distribute across its global network.

Renegade has an experienced management team and in addition to bolstering eOne’s reality television production capabilities (which include its in house teams as well as its 2014 acquisitions of producers Paperny Entertainment Group for £15.1m and Force Four for £6m), it also deepens eOne’s relationships with North American networks.

As we highlighted in our December report, ‘A balanced content portfolio’, eOne has been progressively increasing its exposure in higher-growth and higher-margin television and family segments, which we believe secures the longer-term growth prospects; this bolt-on acquisition is another step in this direction. Post this acquisition, in FY17, we forecast these divisions will account for 66% of group EBITDA, up from 36% in 2015.

Financial impact: Earnings accretive in first year

Renegade’s revenues are generated from network financing of productions, producer fees and the sale of other services (equipment rental), and production costs are expensed. Renegade does not use interim production finance facilities as programme production is entirely funded by the networks. Consequently, we make no changes to our previous forecasts for investment in production, or interim production financing. We increase our FY16 year-end net debt estimate to reflect the acquisition, and have assumed a further c £5m earn-out payment in FY17.

In our revised forecasts, we assume revenue and EBITDA growth of approximately 10% for Renegade. eOne is utilising some of the remaining proceeds of last year’s rights issue and consequently, we forecast the deal will be earnings accretive in the first year. We summarise our forecast changes in Exhibit 1 below and present full forecasts at the back of this report.

Exhibit 1: Summary forecast changes (£m)

FY16e

FY17e

FY18e

Previous

New

Change

Previous

New

Change

Previous

New

Change

Revenue

815.0

815.0

0.0%

912.5

939.7

3.0%

979.0

1,008.9

3.1%

EBITDA

129.5

129.5

0.0%

150.0

154.1

2.7%

173.1

177.6

2.6%

EPS (p)

19.4

19.4

0.0%

19.1

19.5

2.0%

23.1

23.6

2.0%

Adjusted net debt

180.1

199.3

10.7%

145.1

164.9

13.7%

72.4

89.6

23.7%

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2014

2015

2016e

2017e

2018e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

823.0

785.8

815.0

939.7

1,008.9

Cost of Sales

(642.3)

(578.0)

(619.4)

(714.2)

(766.8)

Gross Profit

180.7

207.8

195.6

225.5

242.1

EBITDA

92.8

107.3

129.5

154.1

177.6

Operating Profit

90.2

103.6

124.0

147.8

170.8

Amortisation of intangibles

(36.0)

(22.2)

(25.0)

(25.0)

(25.0)

Exceptional items

(22.1)

(17.9)

(15.0)

(5.0)

0.0

Share based payment charge

(2.7)

(3.4)

(4.0)

(4.0)

(4.0)

JV tax, finance costs, dep'n

0.0

0.1

(2.1)

0.0

0.0

Operating Profit

29.4

60.2

77.9

113.8

141.8

Net Interest

(11.8)

(14.8)

(20.0)

(24.1)

(22.9)

Exceptional finance items

3.9

(1.4)

0.0

0.0

0.0

Profit Before Tax (norm)

78.4

88.8

104.0

123.7

147.9

Profit Before Tax (FRS 3)

21.5

43.9

60.0

89.7

118.9

Tax (reported)

(1.5)

(2.7)

(11.6)

(17.9)

(23.8)

Tax (adjustment for normalised earnings)

(18.4)

(16.8)

(11.8)

(9.9)

(9.5)

Profit After Tax (before non-controlling interests) (norm)

58.5

69.3

80.6

95.8

114.6

Profit After Tax (before non-controlling interests) (FRS3)

20.0

41.2

48.4

71.7

95.1

Non-controlling interests

0.0

0.0

(7.3)

(12.6)

(13.4)

Average Number of Shares, Diluted (m)

318.7

333.4

377.3

427.3

429.4

EPS - normalised (p)

18.4

20.8

19.4

19.5

23.6

EPS - FRS 3 (p)

5.5

11.0

10.5

14.0

19.3

Dividend per share (p)

1.0

1.1

1.2

1.3

1.4

Gross Margin (%)

22.0

26.4

24.0

24.0

24.0

EBITDA Margin (%)

11.3

13.7

15.9

16.4

17.6

Operating Margin (before GW and except) (%)

11.0

13.2

15.2

15.7

16.9

BALANCE SHEET

Non-current Assets

366.0

538.4

750.8

787.3

795.1

Intangible Assets (incl Investment in programmes)

343.1

473.9

597.1

636.9

648.5

Tangible Assets

5.5

6.1

54.9

57.5

60.1

Deferred tax/Investments

17.4

58.4

98.8

93.0

86.5

Current Assets

559.9

634.3

578.4

676.2

753.0

Stocks

47.2

52.0

52.0

52.0

52.0

Investment in content rights

230.1

221.1

211.1

232.1

232.1

Debtors

243.7

289.9

300.3

372.1

418.9

Cash

38.9

71.3

15.0

20.0

50.0

Current Liabilities

(449.2)

(488.3)

(484.8)

(529.1)

(532.4)

Creditors

(401.1)

(398.7)

(395.2)

(439.5)

(442.8)

Short term borrowings

(48.1)

(89.6)

(89.6)

(89.6)

(89.6)

Long Term Liabilities

(168.6)

(319.6)

(263.4)

(294.0)

(288.6)

Long term borrowings

(155.9)

(295.9)

(239.7)

(270.3)

(264.9)

Other long term liabilities

(12.7)

(23.7)

(23.7)

(23.7)

(23.7)

Net Assets

308.1

364.8

581.1

640.4

727.0

CASH FLOW

Operating Cash Flow

264.2

271.9

309.5

435.9

517.4

Net Interest

(10.7)

(13.4)

(20.0)

(24.1)

(22.9)

Tax

(5.9)

(10.8)

(11.6)

(17.9)

(23.8)

Capex

(4.2)

(4.8)

(8.5)

(8.9)

(9.4)

Acquisitions/disposals

(6.1)

(104.3)

(189.2)

(5.2)

0.0

Investment in content rights and TV programmes

(281.4)

(280.8)

(270.0)

(400.0)

(420.0)

Proceeds on issue of shares

0.0

0.0

193.0

0.0

0.0

Dividends

0.0

(2.9)

(3.3)

(5.3)

(6.0)

Net Cash Flow

(44.1)

(145.1)

(0.1)

(25.6)

35.3

Opening net debt/(cash)

144.5

165.1

314.2

314.3

339.9

Movements in exchangeable notes

0.0

0.0

0.0

0.0

0.0

Other including forex

23.5

(4.0)

0.0

0.0

0.0

Closing net debt/(cash)

165.1

314.2

314.3

339.9

304.6

ANALYSIS OF NET DEBT

Total debt

165.1

314.2

314.3

339.9

304.6

Net production finance

54.0

89.3

115.0

175.0

215.0

Adjusted net debt

111.1

224.9

199.3

164.9

89.6

Source: Entertainment One accounts, Edison Investment Research

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