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PERSPECTIVE

Game of loans

By Sue Taylor 22-08-2014

As everyone in the industry knows, there has been a surge of acquisition activity in the sector in recent years. As the bigger indies jostle to snap up production companies to consolidate their position, UK and global broadcasters and overseas studios eager to secure quality content are watching keenly.

Rich pickings there may be, but acquisitions aren’t cheap and for even the larger players some sort of finance solution may be required to get the deal over the line. Lenders will need to understand the combined income and profitability of both companies to ascertain whether the potential acquirer will have the ability to service the debt.

In order to work this out, the lender will want to know what the acquired business will bring to the table. Will the acquisition help the original company build scale in certain markets? Does the target business produce content that complements the purchaser’s portfolio?

The key consideration for any would-be acquirer is how to monetise the content acquired. The most attractive deals are when the existing content hasn’t been fully exploited, there is a healthy pipeline of new productions and if there are any repeat series included in the portfolio, as these can be a real cash cow. Of course, other facts, like cost savings, synergies between the two businesses and creative talent, are all important factors, but the intellectual property held is critical.

As a case in point, the primary motivation behind Argonon’s acquisition of London-based Windfall this year, for which Barclays provided the finance, was the scale and international reach the purchase would provide.

Transparent, a previous acquisition, already sells its finished programmes globally, as does Argonon-owned BriteSpark, making the majority of its shows as UK/US/Canada coproductions. But the difference with Windfall was scale, which Argonon had been seeking for a number of business and creative reasons. Windfall is a major player with a long track record of creating valuable IP, long-running series and internationally valuable programming.

The ownership of rights is an important factor when looking at a purchasing decision. UK production companies are increasingly getting better at negotiating deals with broadcasters and distributors, and are able to retain the rights in both show format and the global IP. As smaller indies club together, they carry more weight into these negotiations, and an increasingly healthy portfolio of productions where they have managed to maintain total rights makes them enticing purchase prospects.

One of the biggest challenges for companies looking to buy and grow is understanding the cash generation of a target firm. Simplistically, turnover and costs will equate to gross profit. However, gross profit doesn’t necessarily correlate to the cash in the business. Businesses in this industry can appear cash rich because they’ve taken the production fee upfront before delivering the programme.

When a production company has all of the cash in the business washing through just one bank account, it can be tricky to identify how much of this is funded by broadcasters to make the production, how much of that production money has already been spent and what the bottom line really looks like. It’s much easier to assess the situation when production funds are kept separate.

Money ‘in the bank’ is one thing, what’s on the books is quite another. When there’s an agreement in place for an overseas production, the exchange rates should be set, so it’s clear what the actual budget will be when production starts. Margins might be quite tight, so where this is not fixed, businesses run the risk of making an investment in a company where there could be a lower return than anticipated.

No one has a crystal ball, but I believe that the current pattern for acquisition and consolidation will continue, particularly in the short term. But as with many things, it’s cyclical and this cycle looks set to continue for a while yet, thanks to the proliferation of networks and new channels of delivery, such as on-demand streaming services, which themselves now offer exclusive content.

There’s also more money in the industry; content is king and we are seeing that the demand for original content is leading to bigger budgets. Meanwhile, content producers are taking advantage of TV tax credits, which since their launch in April 2013 have already boosted the economy by £223m (US$374m). More flexible access to funds gives production companies more buying power, which fuels the cycle. Importantly, more production money is enabling production companies to hire more staff and the best talent available.

Despite the spate of acquisitions and groups of indies forming, the market remains varied and complex. A number of directors coming out of the businesses they have sold have started up new TV production companies, and will need time to nurture and grow their businesses before they look to sell or buy. But with new players coming in, I’m confident we’ll see the next generation of content providers evolve and adapt to meet the ever-changing market and delivery channels.

today's correspondent

Sue Taylor Relationship director
Sue Taylor PERSP

Sue Taylor is a relationship director in the Corporate Banking Media team at Barclays, providing a comprehensive portfolio of TV production companies with tailored financial services. Sue has 24 years’ banking experience and has focused on the TV sector for more than 20.

Helping to finance acquisitions and term debt facilities, as well as facilitating cash management and clearing services, Sue lends against broadcast and distribution contracts in the UK and overseas. Sue works to maximise clients’ return on funds, and assists with the management of foreign exchange rates to mitigate risk with overseas productions.

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