The CEO and the CFO are backing this film and TV company. Should you?
The movie business is the height of glamour. TV is a poor relation, but most of us would still be pretty excited should a soap star or weathergirl come to dinner.
Yet away from the lights, camera and action, the business is made possible by the reality of exploitation and distribution rights. Without the salesman and lawyers who sell content to cinemas, retailers and TV sets across the world, Tinseltown would just be pretty people playing make believe in the smog.
It's this distribution side of film and TV where AIM-listed Entertainment One (LSE: ETO) sets out its stall. Indeed, dialling back the glitz still further, it operates out of Canada and deals with independents, so this isn't a Hollywood production at all.
But Entertainment One's ambitions are suitably big -- to become the 'world's leading independent content and distribution business', giving film producers a viable alternative to the major studios.
To this end it has undertaken acquisitions around the world to extend its content roster and reach.
But it's all done nothing for the share price; since listing in 2007 at 100p, Entertainment One's have fallen steadily to 13.5p in March.
Cue a rather unusual deal. In late March, the company's largest shareholder, the Marwyn Neptune Fund, bought 27 million shares at 12.5p from existing shareholders, while Entertainment One changed its articles of association, enabling Marwyn to hold what is now a 48.5% stake without triggering an offer for all the shares.
If the plan was to take out weak holders, it seemed to work. The share price all but tripled in April and early May to 35p, before slipping back towards 25p.
Top directors pile in
On 24th June -- the day of Entertainment One's final results -- key board members bought as follows:
| | Position | Bought | Price | New holding |
|---|
| Darren Throop | Chief Executive Officer | 300,000 | 21.5p | 4.5 million |
| Giles Willits | Chief Financial Officer | 300,000 | 21.5p | 320,000 |
| Patrice Theroux | President of Global Filmed Entertainment | 300,000
37,000 | 21.5p
24.2p | 430,457 |
Director's buying lots of shares together is good to see, but it's the activity of the Chief Financial Officer that's most heartening. If nothing else, Entertainment One won't go bust tomorrow!
The final results to March 2009 don't suggest it will either. Revenue rose 29.6% to £343.6 million, and adjusted profits before tax was up 27.1% to £16.4 million. Adjusted earnings per share were 8.1p.
The key word is 'adjusted'. Entertainment One actually reported a loss before tax of £31 million, due writing down its US music business and also oddly enough because of Woolworths. Directors argue the demise of the retailer significantly changes the opportunity to exploit its DVD catalogue, and so made a £2.5 million impairment charge (included nearly £700,000 bad debts).
Entertainment One previously reported a loss of £7.7 million in 2008, again due to 'one-off' charges, so the trend isn't good -- partly why a company with £344 million in sales is valued at just £32 million.
Silver screen or a money pit?
Another reason is debt -- the company has £85.3 million in long-term borrowings, against £11.8 million in cash. Other assets include some £40 million in inventories, which is not surprising for a distributor but don't give much real protection.
Entertainment One's big asset, which underpins the banking facilities, is the content library. This was valued at $175 million in June 2008 -- about £106 million.
Recent hits from this roster include the movies Twilight and Knowing, which both topped box offices here and in Canada, and there are 130 film releases planned this year. But I'd rather see directors flagging up old films making money. Acquiring new rights is expensive -- £35.6 million was spent on movie content in 2009.
The content library now spans 4,000 films, 2,800 hours of TV programming and 15,000 music tracks -- all exploited internationally. Is this library really worth over £100 million? That's the all-important question -- and I'd argue answering it is not really about your ability to evaluate Canadian kids television. Rather, it's to do with the future of media.
Entertainment One's music division revenues dwindled to £16.9 million in 2009 -- a grim reminder of how piracy and digital distribution has destroyed that business. This is why the company wrotedown its music business -- future revenues will rely mainly on digital sales, and that's hardly lucrative.
Will this happen to film and TV? The former, which makes up about one third of the company's revenues, looks protected by the cinema experience, and by the bigger challenges of pirating and distributing movies online. Blu-ray is also taking off, which means extra revenues for now.
But Blu-ray will eventually go the way of CDs to be replaced by movies on demand. It's a similar with TV broadcasting, where business model uncertainty is compounded by falling ad revenue.
Facing the music
Entertainment One says its business is built around the content rather than the delivery mechanism, which is all very well but means its future is unknowable. Only Apple has generated a multi-billion business out of iTunes so far, for example. Will movie and TV companies face the fate of music publishers?
At 25p, the shares are on an adjusted P/E of merely 3. Strong operating cashflow of £36 million means the large debt isn't immediately worrying, but putting a valuation on those assets is problematic. I'm not sure whether recent writedowns can really be considered one-offs.
Will the company be making impairment charges for years to come as the industry changes shape?
The directors may have a better idea and so are happy to put their money in. They also allude to a postponed dual-listing on the Toronto Stock Exchange as helping the share price in future.
I'm less confident, and so will keep watching movies and TV rather than investing in them.
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