TV content is king, but growth is tricky; Broadcasters are betting that, by owning the rights to quality content, they will be able to hold on to viewers and revenues, despite competition from online platforms such as Netflix and Y

June 4, 2014 8:34 am

TV content is king, but growth is tricky

By Henry Mance

It was July 2007 when Silvio Berlusconi’s Mediaset group and others sealed the acquisition of Big Brother producer Endemol.

Even by pre-crisis standards, that deal – which valued the production company at €3.4bn, or about 15 times its earnings before interest, taxes, depreciation and amortisation – seems foolhardy.

When Big Brother’s popularity peaked, Endemol was unable to repay its debts, leaving its shareholders empty-handed.

But the high-profile failure has not dented TV broadcasters’ enthusiasm for owning content companies – a series of deals point to valuations rising once again for content producers.

Broadcasters are betting that, by owning the rights to quality content, they will be able to hold on to viewers and revenues, despite competition from online platforms such as Netflix and YouTube.

“There’s a growing understanding that the perceived value of content goes beyond what the customer may be prepared to pay for it individually,” says David Lomer, an investment banker at JP Morgan.

“There is increasing innovation in how media companies are seeking to monetise it.”

In May, ITV bought US production company Leftfield Entertainment for an initial fee of $360m, rising to up to $800m.

The deal is the biggest since ITV was formed a decade ago, exceeding even its acquisition of Friends Reunited.

Cable group Liberty Global teamed up with Discovery Communications to pay £550m for All3Media, the maker of Midsomer Murders.

That is despite Liberty’s previous insistence that it would focus on supplying the internet, rather than owning its own content.

A third deal could create one of the world’s largest independent production companies.

Apollo Global Management, the private equity group that currently controls Endemol, is seeking to merge the company with its other content company Core Media, maker of American Idol, and Shine Group, owned by 21st Century Fox.

The deals all emphasise the importance of content – but the profile of the acquired companies is very different.

“You’ve got two scenarios: some businesses that have grown, and others that have not grown as much,” says Giles Willits, chief financial officer at film distributor Entertainment One. “The premium for growth is what differentiates the deals.”

Leftfield appears to be at the beginning of a growth spurt, pushed by its reality show formats. Real Housewives of New Jersey and Pawn Stars have won high ratings, and are yet to be replicated internationally.

As such they hold a clear attraction for ITV.

“What ITV needs to do is to create new formats and entertainment products that travel,” said Sarah Simon, an analyst at Berenberg. “By their own admission they haven’t really succeeded at that yet.”

The initial acquisition values Leftfield at 12 times last year’s operating profit, significantly more than ITV has paid for smaller companies.

That would fall to six times if Leftfield meets profit targets. However, if it does not, ITV has still “paid a very big upfront price”, says Ms Simon.

Forecasting the performance of content companies is tricky, because their success is often tied to individual employees and fickle consumer tastes.

All3Media, a collection of production companies assembled with backing from private equity house Permira, has struggled for growth, despite owning established brands such as Embarrassing Bodies.

Its earnings before interest, tax, depreciation, amortisation and exceptional items fell 5 per cent last year to £61m.

All3Media’s sale to Discovery and Liberty generated a 1.6 times profit for Permira – less than the private equity group would normally expect for an investment lasting more than seven years.

Liberty may be able to extract more value from the business, by using All3Media’s shows to drive subscriptions to its telephone and broadband packages.

A similar strategy has been pioneered by BT, the telecoms group that has committed about £2bn to sports rights.

However, some industry figures wonder whether All3Media’s entertainment brands are strong enough to drive customer growth, in the way that top-level football rights can.

Whether a cable company might also buy Endemol is unclear.

The proposed merger with Core and Shine would create a substantial independent production company, capable of negotiating with large broadcasters and TV networks.

It would also create a potential exit for Fox from Shine, which it bought for £413m from its founder, Elisabeth Murdoch, daughter of Rupert Murdoch.

But the combined company would not be guaranteed rapid growth.

Shine Group’s revenues have increased modestly from about £400m in 2010 to about £500m three years later.

Core Media appears to have stagnated: according to a letter from Apollo to its investors from September 2013, the company’s value has barely increased since the fund invested.

Endemol’s revenues have slipped to about £1bn with the decline of Big Brother, although one-quarter of that now comes from a growing drama division.

If a merger or sale does occur soon, the company’s valuation is unlikely to match 2007 levels.