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A changing script

17 August 2016 By Olaf Storbeck

British broadcaster ITV is chasing Peppa Pig-owner Entertainment One in a 1 billion pound bid, which its prey has so far rejected. But the UK free-to-air TV company may be assigned a different role in a future takeover drama. After a more than 25 percent drop in its share price this year so far, and a fall in sterling, ITV could become a target itself.

With an EBITDA margin of around 30 percent, ITV is one of Europe’s most profitable free-to-air broadcasters. Its successful content production arm, which makes the kitchen-sink soap opera Coronation Street, accounts for 42 percent of revenue. High-quality TV producers are currently coveted in the media world, because they don’t depend on fickle TV advertising. Besides, ITV has become more than one-third cheaper in euro terms since the start of the year, as both the pound and its share price have fallen. That could be a lure for a buyer who thought they could convert ITV’s assets into non-sterling future revenue streams.

Luxembourg’s RTL Group would be a good fit. Strong in Germany, France and Spain, it lacks a footprint in the UK. With annual revenue of around 10 billion euros, an enlarged RTL would increase its bargaining position relative to multinational advertising customers. And a deal would almost double RTL’s content production revenue, lifting its total share to more than 30 percent of sales.

RTL could in theory afford a bid. Say it offered a 35 percent premium – the least that would probably be needed to persuade investors to give up the chase on Peppa Pig and turn seller instead – ITV’s equity would be valued at 11 billion pounds. Financing two-thirds with leverage would push the combined group’s net debt to 3.8 times 2017 EBITDA. The rest could be paid by raising new equity.

A bottleneck could be RTL majority owner Bertelsmann, which owns 75 percent of the stock. The privately held group may be reluctant to countenance a big acquisition – or risk being diluted through the financing of it. But the race for decent content means taking risks. As Liberum analysts suggest, RTL could even team up with John Malone’s Liberty Global, which already owns 9.9 percent of ITV. Malone might take the broadcasting assets, leaving RTL with the production business. The media M&A script could run a number of ways, but there’s no reason ITV has to be cast as a buyer.

 

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