Teletubbies, Inspector Gadget and Care Bears are making children’s TV show producer DHX Media Ltd. (DHX) ripe for a takeover.
After adding these characters to its portfolio through two acquisitions in the last year, DHX now offers buyers a library of more than 9,000 half-hour TV show segments, including “Yo Gabba Gabba!” and “Madeline,” and associated merchandising rights. Sales at Canada’s DHX are projected to rise 73 percent over the next three years, one of the fastest growth rates among similar-sized North American entertainment companies, according to data compiled by Bloomberg.
The C$348 million ($336 million) producer may lure Netflix Inc. with programs that can add to the streaming service’s push for more viewers, said Byron Capital Markets Ltd. Toymakers Hasbro Inc. or Mattel (MAT:US) Inc., which bought the producer of “Bob the Builder” last year, also could be interested, according to Global Maxfin Capital Inc. Jacob Securities Inc. said DHX’s characters would be a good fit for DreamWorks Animation SKG Inc. (DWA:US) as the studio expands in TV production.
“This is one of the largest independent portfolios of children’s entertainment,” Sameet Kanade, a Toronto-based analyst at Jacob Securities, said in a phone interview. “It’s a no-brainer.”
Kanade estimates that DHX should fetch at least C$5 a share in a sale, a 48 percent premium to yesterday’s closing price of C$3.38. Today, the shares rose 3.3 percent to $3.49 at 10:03 a.m. in Toronto for the second-biggest gain in the Standard & Poor’s/Toronto Stock Exchange SmallCap Index of 220 companies.
Representatives for Halifax, Nova Scotia-based DHX didn’t respond to requests for comment.
DHX last month bought “Teletubbies” producer Ragdoll Worldwide Ltd., building on its 2012 purchase of Cookie Jar Entertainment Inc., owner of the rights to “Inspector Gadget” and “Care Bears.”
The company’s expanded portfolio of children’s programming, which also includes Super Mario and Paddington Bear shows, bolsters its appeal as a takeover candidate, according to Kathy Schutz, an executive vice president and analyst at Bard Associates Inc.
“They’re becoming a real mainstream player in children’s entertainment,” Schutz, whose Chicago-based firm oversees about $300 million including DHX shares, said in a phone interview. “They have just an extremely valuable library.”
Kids’ shows are attractive assets because they gain a new audience every few years, can be easily dubbed in different languages and generate lucrative ancillary revenue from licensing and merchandising, said Ralph Garcea, managing director and head of research at Global Maxfin.
“Inspector Gadget” can just as easily air in French or German as English, and a Yo Gabba Gabba doll appeals to a child in South Africa as well as Canada, he said.
Plus, DHX has the potential to distribute more content digitally through Google Inc.’s YouTube, Netflix (NFLX:US) and Hulu LLC.
After reporting record revenue of C$97.3 million for the year ended in June, analysts estimate sales will climb 73 percent to C$168 million within three years. That tops the growth rate at 89 percent of North American broadcasting and entertainment companies with market values exceeding $100 million, according to data compiled by Bloomberg.
DHX could attract interest from Netflix as the largest U.S. subscription-streaming service develops original content and competes for viewers with traditional media companies, said Dev Bhangui, a Toronto-based analyst at Byron Capital.
Netflix is going to “look for the guy who has the most formidable content,” Bhangui said in a phone interview. DHX stands out as the largest independent provider of children’s TV programming, he said.
DreamWorks may seek to acquire DHX to build out its portfolio of kids’ content, which already includes animated films such as “Shrek” and “Shark Tale,” according to analysts Kanade of Jacob Securities and Aravinda Galappatthige of Canaccord Financial Inc.
DreamWorks Chief Executive Officer Jeffrey Katzenberg said in June he’s seeking to reduce the company’s dependence on films and double TV production revenue to more than $200 million annually by 2015. Last year, DreamWorks paid $155 million for Classic Media, adding TV shows including “Casper the Friendly Ghost” and “Lassie.”
“They’re trying to have these television versions of their brands,” Galappatthige, a Toronto-based analyst, said in a phone interview. “The more you’re able to package those assets, the better prices you get.”
In addition to media companies, DHX could even draw toymakers such as Mattel or Hasbro, according to Garcea of Global Maxfin. Mattel, which already owned brands including Barbie and Hot Wheels, acquired Hit Entertainment Ltd. last year for $680 million, adding characters such as Barney, Bob the Builder and Thomas the Tank Engine.
“Someone like a Hasbro (HAS:US) or a Mattel can leverage those properties to the licensing and merchandising side,” Garcea said of DHX’s children’s programming.
He said the company could easily fetch a 40 percent to 50 percent premium. That would be as much as C$5.07 a share, or C$522 million.
A representative for Glendale, California-based DreamWorks declined to comment on whether the company would be interested in buying DHX. Representatives for Los Gatos, California-based Netflix, El Segundo, California-based Mattel and Pawtucket, Rhode Island-based Hasbro didn’t respond to requests for comment.
DHX has gotten more expensive this year, with the stock almost doubling to a record last week. The shares are up more than ninefold since Entertainment One Ltd. abandoned a takeover bid for DHX in 2008.
DHX’s market value of less than $350 million is still easily digestible for larger acquirers, said Bhangui of Byron Capital. Netflix has a market capitalization of $17.8 billion while Mattel is valued at $13.9 billion.
Multi-billion dollar companies “can swallow this without missing a heartbeat,” Bhangui said. With DHX’s acquisitions bolstering its content library, “they will get taken out.”
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