DHX Media, the owner of the Peanuts franchise, has put itself on the auction block.The Associated Press
The owner of the Peanuts and Teletubbies franchises has put itself on the auction block. Despite its much-loved properties, DHX Media Inc. might not be an easy sell.
Shares in Halifax-based DHX skidded on Tuesday after an initial jump following its announcement that it will seek strategic alternatives – inviting would-be suitors and partners to size up potential deals – following disappointing financial results.
This could get complicated because of the content and branding company's varied segments, high debt load and business that benefits in some ways from its Canadian-ness. A big question is whether DHX is worth more as an integrated business or as a collection of parts.
Many of those parts are household names, not least to preteens and their parents. Aside from Charlie Brown, Snoopy, Tinky-Winky and Dipsy, the company has the rights to Strawberry Shortcake, Inspector Gadget, Caillou, Degrassi and others. It distributes shows globally and owns the Family Channel in Canada as well as WildBrain, which concentrates on children's content for YouTube.
Analysts peg the net asset value of the sum of the parts in a wide range from $5.30 a share to as high as $8.30. The company's B shares were off more than 7 per cent at $5.08 on the Toronto Stock Exchange on Tuesday, putting the market capitalization at about $700-million.
For deal comparison, some commentators cite Comcast Corp.'s $3.8-billion (U.S.) acquisition of DreamWorks Animation SKG Inc. in 2016, a deal done at a fat premium of 21 times earnings before interest taxes, depreciation and amortization. Mimicking such a feat appears unlikely, given DHX's unique set of traits. Those include a focus on buying and rejuvenating well-known franchises, rather than investing heavily in new ones – DreamWorks's forte.
The odds of a Canadian rival stepping up with a hefty premium are slim, and a foreign buyer may not be eligible for Canadian production funding and tax breaks that are a sizable part of DHX's business model, Bank of Montreal analyst Tim Casey wrote in a note to clients.
"For DHX, there is [a] complicating factor: Canadian content," he said.
Canadian Radio-television and Telecommunications Commission rules mandate that the company's DHX Television unit be Canadian owned, and Mr. Casey said he doubts Corus Entertainment Inc. would be eligible because of CRTC concerns about media concentration.
However, the TV unit could be carved out and sold to avoid regulatory concerns, Rob Goff, analyst at Echelon Wealth Partners, said in a research note.
DHX's stock price tumbled last week after the company's fourth-quarter results and its outlook for 2018 disappointed investors. Of particular concern is the debt level, which climbed with the company's $345-million acquisition of the entertainment division of Iconix Brand Group Inc., giving it a majority interest in Peanuts Worldwide LLC.
Dana Landry, DHX's chief executive officer, also acknowledged in a conference call to discuss the results that the deal distracted them from other parts of the business.
However, the outlook for content demand is strong, because of the popularity of Netflix Inc. and other streaming services, which should bring potential bidders to DHX's door, said Robert Bek, an analyst at Canadian Imperial Bank of Commerce.
There is speculation of potential interest from Netflix, which has pledged to spend $500-million over five years in Canada. An industry source suggested the company could acquire various divisions or form a partnership with DHX, allowing it to avoid regulatory worries. Not everyone is convinced, however.
"Count us among the skeptics," Mr. Casey said. "We believe that over the last few years Netflix has demonstrated a willingness to pursue commercial production arrangements tied to individual projects rather than purchase overall libraries and pay for corporate overheads."
Jeffrey Jones