Acquisition of balance of The Mark Gordon Company

Source: RNS
RNS Number : 2503D
Entertainment One Ltd
29 January 2018
 

--THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND NOT FOR RELEASE, PUBLICATION, DISTRIBUTION OR FORWARDING, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES, AUSTRALIA, NEW ZEALAND, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY PROVINCE OF CANADA OTHER THAN ONTARIO, QUEBEC, ALBERTA AND BRITISH COLUMBIA OR ANY JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION IS UNLAWFUL. PLEASE SEE THE IMPORTANT NOTICE AT THE END OF THIS ANNOUNCEMENT.

29 January 2018

Entertainment One Ltd. ("eOne" or the "Company")

Acquisition of the balance of equity interest in The Mark Gordon Company

·      eOne to acquire remaining 49% minority of Deluxe Pictures d/b/a The Mark Gordon Company ("MGC") following successful business performance

·      Acquisition will further strengthen the Company's position as a leading global content business and provide enhanced content opportunities

·      Mark Gordon to join eOne as President and Chief Content Officer, Film, Television and Digital, bringing him and his team in-house to help drive both Film and Television content strategy and enhancing eOne's ability to attract creative talent and partners

·      Consideration of US$209m (c. 8.8x FY19 consensus EBITDA) will comprise US$160m cash and US$49m of eOne shares

·      Consideration to be partially financed by the proceeds of the Placing announced by the Company today with the remainder expected to be financed by a debt issuance

·      Acquisition expected to be c. 2% earnings accretive in the first full year of ownership on a fully diluted basis, before the impact of targeted cost savings of US$7m to US$10m by FY20

·      Funding mix provides financial flexibility, with an estimated net debt/consensus EBITDA ratio of less than 2.0x at FY18

eOne today announces that Earl Street Capital, Inc., a wholly owned subsidiary of the Company, has entered into a conditional share purchase agreement to acquire the balance of the equity interests of MGC not already held by eOne from The Mark R. Gordon Revocable Trust (the "MG Trust") for an aggregate consideration of US$209m.  In addition, the MG Trust shall be entitled to receive further amounts payable in cash after completion of the Acquisition ("Completion") in respect of their pro rata portion of certain pre-acquisition contingent receipts, if actually received by MGC, the outcome and valuation of which are currently uncertain, up to a maximum aggregate amount of US$37.5m. The Acquisition will increase eOne's ownership of the issued share capital of MGC from 51% to 100%.

The Consideration will be satisfied by the payment of US$160m in cash and by the issue of 10,826,566 Common Shares to the MG Trust, equating to US$49m. 

The MG Trust is restricted from disposing of any of the Consideration Shares before the first anniversary of Completion, save for 4,005,829 Consideration Shares equivalent to the amount of certain tax liabilities of the MG Trust in respect of the issue of the Consideration Shares and subject to orderly market arrangements. The sale of any remaining Consideration Shares following the initial twelve month lock-in period is subject to orderly market arrangements for a further twelve months. The lock-in undertaking is subject to customary exceptions, including where the Company and its corporate brokers (at the relevant time) have given their consent to a disposal.

The cash amount of the Consideration will be financed partially by the proceeds of the Placing announced by the Company today which is expected to complete on 1 February 2018 and expected to raise up to £53m (approximately US$75m), before expenses, which represents approximately 4% of the Company's market capitalisation based on the Company's market capitalisation as of 26 January 2018. The remainder of the cash amount of the Consideration is expected to be financed by a debt issuance, the structure and terms of which will be finalised prior to Completion and which is expected to be announced in early February. The total amount of the Placing and debt issuance is expected to raise £123m (approximately US$175m), of which US$160m will be used to fund the cash amount of the Consideration and US$15m is intended to be used to finance other targeted content acquisitions and to cover transaction expenses.

The Board believes that the Placing and proposed debt issuance is an appropriate funding mix to preserve the Company's balance sheet and provide financial flexibility, with an estimated net debt/consensus EBITDA ratio of less than 2.0x at FY18, which the Board expects will deleverage back to the current level by the end of FY20.

The Acquisition is not conditional upon the completion of the Placing or the debt issuance.  If the proceeds of the Placing are received but the Acquisition does not complete, the Directors will consider, in the best interests of Shareholders as a whole, whether to retain the proceeds of the Placing to be utilised for other investment opportunities and/or for the repayment of existing debt, or to return some or all of the proceeds pro rata to Shareholders (including those who did not participate in the Placing), in the most efficient manner from a taxation perspective, in accordance with applicable law.

Under the Listing Rules, the Acquisition is a related party transaction as Mark Gordon is the sole trustee and beneficiary of the MG Trust as well as a director of MGC, which is a subsidiary of the Company. Therefore, as required under the Listing Rules, the Company is seeking the approval of its Shareholders for the Acquisition before Completion takes place, and Completion is conditional on such approval. All conditions to the Acquisition have to be satisfied by 31 March 2018. The Company is therefore required to complete the debt issuance or find other sources of finance to fund the Acquisition by 31 March 2018 in order to meet its obligations under the Acquisition Agreement.

A circular calling a special meeting of Shareholders, expected to be held at the end of February, is expected to be posted to Shareholders within approximately one week from the date of this announcement and Completion is expected to occur within three business days of that meeting.

Background to the Acquisition and description of the MGC business

MGC is an LA-based independent studio that develops and produces premium television and film content for the major US networks and international distribution, including the production of feature films. Mark Gordon, who founded MGC, is an award-winning film and television producer with a strong track record of 20 years of successful television and film production.

In January 2015, the Company completed the acquisition of a 51% equity stake in MGC for consideration of £86.3m. The consideration for that acquisition was an aggregate sum of US$127.5m in cash and US$5.1m paid by the issue of 1,082,568 Common Shares in eOne on 7 January 2015. The Company also entered into a shareholders' agreement to regulate the relationship between the Company and MGC. As part of that acquisition, the Company obtained the exclusive worldwide right to distribute the film and television outputs of MGC and Mark Gordon entered into a new long term employment agreement with MGC. Since that acquisition, the Company and MGC have partnered together with MGC financing and producing content for various networks and platforms, with the Company then distributing this content internationally. Mark Gordon is currently Chief Executive Officer of MGC.

On 19 May 2015, the Company entered into an amendment to the shareholders' agreement in respect of its shareholding in MGC and, following such amendment, the Company obtained control over certain key board decisions of MGC, whereas previously all such decisions were made on a joint control basis between the Company and the MG Trust. As a result, MGC was fully consolidated into the Group's consolidated financial statements as a subsidiary with effect from 19 May 2015, such accounting treatment being reflected in the Group's consolidated financial statements for FY16. Prior to this, MGC was accounted for by the Company as a joint venture.

MGC's results are already consolidated in eOne's financial statements. In FY17, MGC's revenue was £119.9m compared to £14.6m in FY16, growing by 721%. Underlying EBITDA amounted to £26.2m (EBITDA margin 22%) in FY17 compared to £14.4m (EBITDA margin 99%) in FY16, growing by 82%, with continuing momentum through to FY18. As at FY17, MGC had gross assets of £203.0m.

In the six months ended 30 September 2017, MGC's unaudited revenue was £51.6m compared to £28.3m in the six months ended 30 September 2016, growing by 82%. Unaudited underlying EBITDA amounted to £9.9m (EBITDA margin 19%) in the six months ended 30 September 2017 compared to £9.0m (EBITDA margin 32%) in the six months ended 30 September 2016, growing by 10%. As at 30 September 2017, MGC had unaudited gross assets of £210.6m.

Reasons for the Acquisition

The Board believes that the Acquisition is in line with the Company's strategy to create, own and control high quality content and will minimise eOne's risk exposure through gaining full control of MGC. Following the successful business performance of MGC, the Company is acquiring the remaining 49% interest in a pure-play content business with a proven track record of creating premium television and film content with strong international appeal. Through its existing relationship with eOne, MGC has successfully migrated its model to become a leading independent production studio, leveraging eOne's global sales infrastructure.

MGC currently owns a substantial library of television and film participation rights which eOne expects will further enhance the Company's capabilities in the television and film industry. MGC has a favourable outlook underpinned by a high quality portfolio and partnerships with new digital entrants, including Netflix and Amazon, and a strong content pipeline of over 50 projects currently in active development. These projects are expected to help drive future earnings growth, cash flow generation and library value, which would lead to strong results in FY19. MGC is also building on positive momentum from the release of Molly's Game in January 2018, Designated Survivor season 2 continuing for the calendar year 2018, new television project Youth & Consequences for YouTube Red, new series of The Rookie for ABC and the following movies in development: The Chronicles of Narnia: The Silver Chair, The Killer and All the Old Knives.

Strategic rationale

The Board believes that the Acquisition will further strengthen the Company's position as a leading global content business. As announced in its FY17 results, the Company is transitioning its operating structure to unify its Film and Television operations into a single division, which will be further facilitated by the Acquisition.

Mark Gordon will join eOne as President and Chief Content Officer, Film, Television and Digital on a new 5 year agreement with a 2 year extension exercisable by either Mark Gordon or the Company within certain time periods before the expiry of the initial term, bringing him and his team in-house to help drive continued improvement of the profile of the eOne Film and Television content business and its status within the industry. As part of the Consideration, Mark Gordon will receive US$49m in eOne shares, underlining his belief in, and commitment to, the Group's strategy. The Company also anticipates that with Mark Gordon in this role, its ability to attract creative talent and partners will be enhanced, generating new content opportunities.

Financial benefits

The Board believes that the transaction will be financially beneficial to the Company and will add value for Shareholders through:

·      strengthening the Company's growth profile through enhanced content opportunities;

·      estimated annualised cost savings of approximately US$7m to US$10m by FY20 through further integration of MGC into the Group; and

·      an expected c. 2 % accretion of eOne's earnings per share in the first full year of 100% ownership of MGC (being FY19), on a fully diluted basis, and excluding the impact of targeted cost savings.

The Company notes that consensus revenue figures for MGC for FY18 and FY19 are estimated to be £155m and £178m, respectively, which represents a compound annual growth rate of 130% from FY16 to FY19. In FY18 and FY19, MGC's consensus underlying EBITDA is estimated to be £30m (consensus EBITDA margin 19%) and £34m (consensus EBITDA margin 19%), respectively, which represents a compound annual growth rate of 33% from FY16 to FY19.

The Consideration represents c.8.8x the consensus EBITDA for FY19 excluding targeted cost savings.

Further to the reported results of the Group for the six months to 30 September 2017, current trading performance, with respect to the Group, remains in line with management expectations.

Analyst consensus has been compiled as at 26 January 2018 and includes estimates from 8 research institutions.

 

Commenting on the Acquisition, eOne's Group Chief Executive, Darren Throop, said:

 

"The acquisition of the remaining stake in The Mark Gordon Company is an exciting time for both eOne and The Mark Gordon Company and a natural step in our strategy of creating and owning high quality content. We would like to welcome Mark Gordon into his new and expanded role with eOne and look forward to seeing our Television and Film operations continue to make great progress under his leadership."

 

Presentation and dial-in details

A conference call to investors and analysts will be held at 17:00 GMT on 29 January 2018. Dial-in access details for the call are available from the Company. The slides accompanying the presentation will be available at www.entertainmentone.com shortly before the start of the presentation. A replay will be available for 7 days on +44 (0) 20 3936 3001, PIN 766827.

 

Contacts

Entertainment One Ltd.

Patrick Yau, Investor Relations Director

+44 (0) 20 3714 7931

J.P. Morgan Cazenove   

Hugo Baring
Virginia Khoo
Thomas White

+44 (0) 20 7742 4000

Alma PR

Rebecca Sanders-Hewett

+44 (0)20 3865 9668

About eOne

Entertainment One Ltd. (LSE:ETO) is a global independent studio that specialises in the development, acquisition, production, financing, distribution and sales of entertainment content. The Company's diversified expertise spans across film, television and music production and sales, family programming, merchandising and licensing, and digital content. Through its global reach and expansive scale, powered by deep local market knowledge, the Company delivers the best content to the world. eOne's shares are listed on the Official List and it is a constituent of the FTSE 250 index.

eOne's robust network includes film and television studio The Mark Gordon Company; newly-launched MAKEREADY with Brad Weston; content creation venture Amblin Partners with Steven Spielberg, DreamWorks Studios, Participant Media, and Reliance Entertainment; leading feature film production and global sales company Sierra Pictures; unscripted television production company Renegade 83; world-class music labels Dualtone Music Group and Last Gang; and award-winning digital agency Secret Location.

The Company's rights library, valued at US$1.7 billion (as at 31 March 2017),  is exploited across all media formats and includes around 80,000 hours of film and television content and around 40,000 music tracks.

IMPORTANT NOTICE:

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of MAR) prior to its release as part of this announcement. The person responsible for arranging release of this information on behalf of eOne is Edward Parry.

In addition, market soundings (as defined in MAR) were taken in respect of the Placing and the Acquisition with the result that certain persons became aware of inside information (as defined in MAR), as permitted by MAR. This inside information is set out in this announcement and the separate announcement in respect of the Placing being made by the Company today.  Therefore, those persons that received inside information in a market sounding are no longer in possession of such inside information relating to the Company and its securities.

The release, publication or distribution of this announcement in certain jurisdictions may be restricted by law and therefore persons in such jurisdictions into which these materials are released, published, distributed or forwarded should inform themselves about and observe such restrictions. This announcement is for information purposes only and is not intended to, and does not form part of any invitation to purchase, subscribe for, or otherwise acquire or dispose of, or any solicitation to purchase or subscribe for or otherwise acquire or dispose of any securities in any jurisdiction. The information contained herein is not for release, publication, distribution or forwarding, directly or indirectly, in or into the United States (including its territories and possessions, any state of the United States and the District of Columbia). Any failure to comply with any such restrictions may constitute a violation of the securities laws of such jurisdiction.  This announcement does not contain or constitute an offer to sell or the solicitation of an offer to purchase securities to any person with a registered address in, or who is resident in, Australia, New Zealand, Japan, the Republic of South Africa or in any jurisdiction in which such an offer or solicitation is unlawful. None of the securities referred to herein have been or will be registered under the relevant laws of any state, province or territory of Australia, New Zealand, Japan or the Republic of South Africa. Subject to certain limited exceptions, none of these materials will be released, published, distributed or forwarded in or into Australia, New Zealand, Japan or the Republic of South Africa.

This announcement does not contain or constitute an offer to sell or the solicitation of an offer to purchase securities in any province or territory of Canada. This announcement does not constitute an "offering memorandum" within the meaning of the securities laws of any province or territory of Canada.

This announcement does not contain or constitute an offer for sale or the solicitation of an offer to purchase securities in the United States. The securities referred to herein have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or jurisdiction of the United States, and may not be offered or sold in the United States absent registration under the Securities Act or an available exemption from, or transaction not subject to, the registration requirements of the Securities Act. There will be no public offer of any securities in the United States. None of the Placing Shares, the Consideration Shares, this announcement or any other document connected with the Acquisition or the Placing has been or will be approved or disapproved by the United States Securities and Exchange Commission or by the securities commissions of any state or other jurisdiction of the United States or any other regulatory authority, and none of the foregoing authorities or any securities commission has passed upon or endorsed the merits of the offering of the Placing Shares or the Consideration Shares or the accuracy or adequacy of this announcement or any other document connected with the Acquisition or the Placing.  Any representation to the contrary is a criminal offence in the United States.

J.P. Morgan Securities plc (which operates its investment banking activities in the United Kingdom as J.P. Morgan Cazenove) is authorised by the PRA and regulated in the United Kingdom by the PRA and the FCA. Investec is authorised by the PRA and regulated in the United Kingdom by the PRA and the FCA. RBC Capital Markets is the business name used by RBC Europe Limited which is authorised by the PRA and regulated in the United Kingdom by the PRA and the FCA and is a subsidiary of the Royal Bank of Canada.

Each of the Bookrunners is acting exclusively for the Company and no one else in connection with the Placing and, in the case of J.P. Morgan Cazenove, as sponsor in connection with the Acquisition, and will not regard any other person (whether or not a recipient of this document) as a client in relation to the Placing or, in the case of J.P. Morgan Cazenove, the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients or for providing advice in relation to the Placing, the Acquisition or any matters, transactions or arrangements referred to in this document. Apart from the responsibilities and liabilities, if any, which may be imposed on the Bookrunners by FSMA or the regulatory regime established thereunder, none of the Bookrunners accepts any responsibility whatsoever or makes any representation or warranty, express or implied, for the contents of this document including its accuracy, completeness or verification or for any statement made or purported to be made by it, or on its behalf, in connection with the Company, the Placing Shares, the Consideration Shares, the Acquisition or the Placing and nothing in this document shall be read as a promise or representation in this respect whether as to the past or future. The Bookrunners accordingly disclaim all and any liability whatsoever arising in tort, contract or otherwise (save as referred to above) which they might otherwise have in respect of this document or any such statement. 

This announcement has been issued by, and is the sole responsibility of eOne. The information contained in this announcement is for background purposes only and does not purport to be full or complete. No reliance may or should be placed by any person for any purpose whatsoever on the information contained in this announcement or on its accuracy or completeness. The information in this announcement is subject to change.

Recipients of this announcement should conduct their own investigation, evaluation and analysis of the business, data and property described in this announcement. This announcement does not constitute a recommendation concerning any investor's options with respect to any matters disclosed herein. The price and value of securities can go down as well as up. Past performance is not a guide to future performance. The contents of this announcement are not to be construed as legal, business, financial or tax advice. Each shareholder or prospective investor should consult with his or her or its own legal adviser, business adviser, financial adviser or tax adviser for legal, financial, business or tax advice. 

Neither the contents of eOne's website nor any website accessible by hyperlinks on eOne's website is incorporated in, or forms part of, this announcement.

This announcement contains "forward-looking statements" which includes all statements other than statements of historical fact, including, without limitation, those regarding the Company's financial position, business strategy, plans and objectives of management for future operations, or any statements preceded by, followed by or that include the words "targets", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "would", "could" or similar expressions or negatives thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond the Company's control that could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future. These forward-looking statements speak only as at the date of this announcement. None of the Company, J.P. Morgan Cazenove, Investec, RBC Capital Markets or their respective directors, officers, employees, agents, affiliates and advisers, or any other party undertakes or is under any duty to update this document or to correct any inaccuracies in any such information which may become apparent or to provide you with any additional information, other than any requirements that the Company may have under applicable law or the Listing Rules, the Prospectus Rules, the Disclosure Guidance and Transparency Rules or MAR. To the fullest extent permissible by law, such persons disclaim all and any responsibility or liability, whether arising in tort, contract or otherwise, which they might otherwise have in respect of this announcement.  The information in this announcement is subject to change without notice.

A copy of the Circular, when published, will be available from the registered office of the Company and at the Company's website at www.entertainmentone.com.



DEFINITIONS AND INTERPRETATION

 

The US dollar to sterling exchange rate used in relation to the Consideration, fundraising amounts and the Acquisition is US$1.42:£1.

 

"Acquisition"

the sale of shares by the MG Trust representing 49% of the entire issued capital of MGC and the purchase of such shares by Earl Street Capital, Inc.

"Acquisition Agreement"

the agreement entered into by Earl Street Capital, Inc., the Company, the MG Trust and Mark Gordon dated 29 January 2018 in connection with the Acquisition

"Board"

the board of directors of the Company from time to time

"Bookrunners"

J.P. Morgan Cazenove, Investec and RBC Capital Markets

"Common Shares"

common shares of no par value in the capital of the Company

"Completion"

completion of the Acquisition in accordance with the terms of the Acquisition Agreement

"Company" or "eOne"

Entertainment One Ltd., a corporation incorporated under the laws of Canada

"Consideration"

the total aggregate amount of US$209m payable for the Acquisition

"Consideration Shares"

the 10,826,566 Common Shares to be issued to the MG Trust on Completion

 

"consensus"

 

when used in respect of revenue or EBITDA (as applicable) means the consensus revenue or EBITDA (as applicable) provided by analysts who submit their numbers to the Company for consensus calculation purposes, compiled as at 26 January 2018 at the exchange rates utilised by such analysts

"Directors"

the directors of the Company from time to time

"EBITDA"

operating profit or loss excluding amortisation of acquired intangibles; depreciation; amortisation of software; share-based payment charge; tax; finance costs and depreciation relate to joint ventures; and operating one-off items

"FCA"

the Financial Conduct Authority of the United Kingdom

"FSMA"

Financial Services and Markets Act 2000, as amended

"FY15"

the financial year ended 31 March 2015

"FY16"

the financial year ended 31 March 2016

"FY17"

the financial year ended 31 March 2017

"FY18"

the financial year ended 31 March 2018

"FY19"

the financial year ended 31 March 2019

"FY20"

the financial year ended 31 March 2020

"Group"

the Company and its subsidiaries and subsidiary undertakings from time to time, including MGC

"Investec"

Investec Bank plc

"ISIN"

International Securities Identification Number

"J.P. Morgan Cazenove"

J.P. Morgan Securities plc (which carries on its UK investment banking activities as J.P. Morgan Cazenove)

"Listing Rules"

the listing rules and regulations made by the FCA under s73A of FSMA, as amended from time to time

"London Stock Exchange"

London Stock Exchange plc

"MAR"

Regulation (EU) No 596/2014

"MGC"

Deluxe Pictures d/b/a The Mark Gordon Company, a corporation organised and existing under the laws of California

"MG Trust"

The Mark R. Gordon Revocable Trust

"Official List"

the Official List of the UK Listing Authority maintained by the FCA

"Placing"

the placing of new Common Shares announced by the Company on the date of this announcement

"Placing Shares"

the new Common Shares to be issued by the Company pursuant to the Placing and "Placing Share" shall be construed accordingly

"PRA"

the Prudential Regulation Authority of the United Kingdom

"Prospectus Rules"

the prospectus rules made by the FCA under s73A FSMA

"RBC Capital Markets"

means RBC Europe Limited (which uses the business name RBC Capital Markets)

"Securities Act"

the United States Securities Act of 1933, as amended

"Shareholders"

holders of Common Shares, each individually being a "Shareholder"

"Sterling" or "£"

the lawful currency of the United Kingdom

"underlying EBITDA"

operating profit or loss excluding amortisation of acquired intangibles; depreciation; amortisation of software; share-based payment charge; tax; finance costs and depreciation relate to joint ventures; and operating one-off items

"UK Listing Authority"

the FCA acting in its capacity as competent authority for the purposes of Part VI of FSMA

"UK" or "United Kingdom"

the United Kingdom of Great Britain and Northern Ireland

"US" or "United States"

the United States of America, its territories and possessions, any State of the United States and the District of Columbia

"US dollar" or "US$"

the lawful currency of the United States

 

 

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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