Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

ITV is trying to buy Peppa Pig on the cheap. The owner of the porcine children's character, Entertainment One, should make the U.K. broadcast giant raise its 1 billion pound ($1.3 billion) takeover proposal.

Entertainment One has itself to blame for becoming a target. Last year, it bit off more than it could chew. In September there was a big share sale to fund the purchase of a controlling stake in Peppa creator Astley Baker Davies. This was swiftly followed by a strangely expensive bond issue. Throw in an exit by the top shareholder and investors lost faith.

A Switch-Off For Investors
Entertainment One lost the confidence of the market last year after raising equity for acquisitions
Source: Bloomberg

The kerfuffle has created an opportunity for ITV. Entertainment One shares were trading at 158.6 pence, 50 percent below 2015's all-time high and valuing the group at 678 million pounds, before Bloomberg News revealed takeover interest in April.

It's hard to fault the strategic logic of merging Entertainment One into ITV's content and distribution machine. Small wonder the target isn’t resisting a deal in principle. But Entertainment One rightly says ITV's 236 pence a share pitch is too low.

Dramatic Episode
ITV has not fully recovered from its Brexit sell-off amid concerns about exposure to falling ad spend
Source: Bloomberg

Moreover, ITV faces a tactical difficulty: the Canada Pension Plan Investment Board bought 18 percent of Entertainment One last September for 269 pence per share. It's unlikely to want to sell below that. Its presence also probably precludes a hostile bid.

Fortunately, ITV can justify going higher and has the balance sheet to do so. The current proposal is worth 1.4 billion pounds after factoring in assumed debt. That's just 9 times Entertainment One's forecast Ebitda of 152 million pounds this year. Remember, the company is targeting Ebitda of 200 million pounds in 2020. With 77 percent of revenue outside the U.K., it's also a winner from the post-Brexit slump in sterling.

An offer at, say, 300 pence a share would lift the exit multiple to 10.6 times. This would still look inexpensive by comparison with global peers. Lions Gate, which is behind the Hunger Games, commands a forward enterprise multiple of 16 times, while Eros International, the Indian film distributor, is on 11 times.

ITV needs to pay up to bring home the bacon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net