Media

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.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

This little piggy escaped. Peppa is teaching ITV that content producers have robust takeover defenses.

The U.K. broadcaster on Thursday abandoned its 1 billion-pound pursuit of Entertainment One, owner of the hit children's cartoon series.

Entertainment One appeared to be open to a deal at a higher price. ITV's decision to walk rather than go hostile with its 236-pence-a-share proposal suggests it realizes the Canadian group had alternatives. Private-equity firm KKR had been considering a bid.

This Little Piggy
Entertainment One has soared since ITV emerged as a bidder in April
Source: Bloomberg

When ITV's plans surfaced in April, Entertainment One shares were languishing at about 160 pence and equity markets were still reeling from the January sell-off. Its proposal, formally submitted in August, was at a near 50 percent premium to that.

Since the Brexit vote, however, those overtures started to look less generous. U.K. shares have recovered sharply as the pound has fallen -- especially those of companies which derive most of their revenue from other currencies. Less than a quarter of Entertainment One's revenue came from the U.K. in the last fiscal year, according to Bloomberg data.

Flying Pig
Less than a quarter of Entertainment One's revenue comes from the U.K.
Source: Bloomberg

What's more, ITV's pitch looked un-enticing compared to where shares of other publicly traded content production businesses are trading and to valuations at which other deals have been completed.

ITV's Deals
Recent takeovers and investments
Source: Bloomberg

Including assumed debt, ITV's offer valued Entertainment One at only nine times forecast Ebitda for this year. Publicly traded competitors, among them Lions Gate and Eros, trade at an average of 11 times. Comcast agreed to pay a near-30 times multiple for Dreamworks, the fabled animation studio behind Shrek.

The problem for ITV is that there are many buyers for companies that produce valuable content today -- even at a time when many fret about young people watching fewer hours of television. In Europe, Vivendi and Sky are on the hunt for production deals, and in the U.S. companies like 21st Century Fox and Viacom know they have to beef up in content so as to avoid being hostage to the cable companies they rely on for distribution.

Add in overseas buyers such as China's Dalian Wanda, which gobbled up U.S. film studio Legendary Entertainment for $3.5 billion in March, and the balance is firmly titled in sellers' favor.

For all the logic of a deal, ITV was always going to have to pay up -- and is likely to have to do so again in future. CEO Adam Crozier wants to lessen the broadcaster's dependence on advertising revenue and further expand ITV Studios. That business contributed 37 percent of revenue in 2015 and, analysts reckon, about 25 percent of Ebitda.

Studio Growth
ITV is building a content production business to cut its reliance on advertising
Source: Bloomberg Intelligence

It might have made sense for ITV to break up Entertainment One and sell parts to others to make it more digestible, as Gadfly noted in April. But such bacon slicing would have added complication. Perhaps the combination of size and expense made Crozier balk. 

Entertainment One shares fell 15 percent on news of ITV's withdrawal. But at 214 pence, the stock is only 10 percent below ITV's proposal. There may be some bid speculation in there.

ITV can claim it is being disciplined. The reaction suggests the market sees plenty of value in Peppa yet.

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

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net