Teletubbies Owner DHX Media Gets Back on the Acquisition Trainby
Canadian firm looking for a major brand to buy in 2017
Stock price has stagnated amid revenue issues, slowing growth
The owner of the Teletubbies children’s TV show is hunting for acquisitions again after a quiet two years.
DHX Media Ltd., based in Halifax, Nova Scotia, is looking for one major international brand to acquire in 2017 and several smaller ones, signaling a return to its growth-through-acquisition strategy after staying on the sidelines since purchasing Nerd Corps Entertainment Inc. in 2014
“There are some pretty significant global brands that we are pursuing,” Chief Executive Officer Dana Landry said in an interview. “We’re pretty optimistic that we’ll be successful.” His goal is to buy one large, well-known brand as well as three to five smaller online-only shows next year, he said. The company has C$70 million in cash it could deploy, and Landry said he’s open to pushing leverage to 3.5 times its debt-to-earnings ratio from roughly two times now.
DHX buys rights to TV shows and adds to its catalog by producing its own new shows, then selling them to traditional broadcasters and internet streaming services like Netflix or Amazon Prime. After spending more than $380 million on acquisitions from 2012 to 2014, DHX stepped back. Its stock price, which had rocketed from less than C$1 at the beginning of 2012 to a high of C$10 at the end of 2014, has sunk back to around C$6.90 since then.
Investors are motivated by catalysts like acquisitions and without big deals the stock price leveled off, Landry said.
“The organic growth of DHX Media is undervalued in the marketplace,” Rob Goff, head of research at Echelon Wealth Partners, said in a Nov. 15 note to clients. DHX’s fiscal 2016, which ended in June, was a year of re-positioning and the company should perform well this fiscal year, he said.
But DHX has also been stymied by slowing growth in the traditional television industry. That, coupled with a change in how it books revenue from the shows it produces on its own, contributed to a 16 percent year-over-year decline in total revenue in the quarter that ended Sept. 30.
Still, DHX actually raised its forecasts for the fiscal year that ends in June, saying it’s perfectly positioned to benefit from the trend of kids skipping both traditional TV and streamers like Netflix and jumping straight to watching shows on Alphabet Inc.’s YouTube.
On YouTube, DHX streams its content under the umbrella brand WildBrain and gets a direct cut of every ad that plays before each show, instead of selling them as a block to TV broadcasters or Netflix. Earlier this month, DHX increased its 2017 revenue guidance for WildBrain to as much as C$35 million from a previous projection of as much as C$34 million.
In a survey of 2,700 people DHX did with polling firm Ipsos, the company found 72 percent of content consumed by kids is done online. Forty percent of kids in the families surveyed used a smartphone and YouTube was more popular than Netflix.
DHX plans to make three to five acquisitions with WildBrain, targeting the top 50 children-focused YouTube channels. Once they’re in the WildBrain fold, DHX can command a higher share of advertising income and get better prices from advertisers because of the brand’s more than 400,000 subscribers.
“The greater depth of targets suggest a much greater likelihood of acquisitions being successfully completed,” Goff said. If Landry and his team can execute on their plan it should push the stock price up significantly, he said.
Landry said he expects Facebook Inc., Amazon.com Inc. and Alibaba Group Holding Ltd. to build their own advertising-supported streaming services and plans to run WildBrain on those as well. DHX has already signed content deals with Amazon and Alibaba’s subscription streaming services.
“Think of this as like Nickelodeon was 20 years ago, an overarching brand,” Landry said.
Still, returning to an advertising revenue model after focusing on subscription streaming services like Netflix brings up an age-old problem for kids-show producers: advertising to children. YouTube has come under fire in the past for blurring the line between advertising and programming and playing ads for junk food and gambling alongside children’s content.
Despite the awkwardness, an advertising-supported model is perfect for boosting one of the company’s other major revenue sources: selling toys based on its TV shows. A child could be watching Teletubbies, for example, and at the end of the show add a stuffed Dipsy or Po to a wish list their parent’s could buy from later on.
The potential for partnering with an online e-commerce giant like Amazon or Alibaba on a project like this would be huge and the survey DHX did with Ipsos suggests parents like the idea too, Landry said.
“There’s a whole new market, we’re just on the cusp of that,” he said.