June 27, 2018 / 9:50 AM / 3 months ago

Breakingview - Endemol’s $4 bln sale needs “Love Island” glitter

LONDON (Reuters Breakingviews) - It’s time for a production company recoupling. The question is whether Endemol Shine Group’s suitors see beyond ugly features like a debt-heavy balance sheet. Rival studio ITV’s current hit “Love Island” could help.

Publicity shot for Endemol's MasterChef Junior. Image courtesy of the company

Endemol’s parents, private equity firm Apollo Global Management and Rupert Murdoch’s Twenty-First Century Fox, are seeking a partner for the loss-making producer of “Big Brother”. They’ve hired matchmakers at Deutsche Bank and LionTree for a sale that could fetch between $2.5 billion and $4 billion, CNBC reported.

That range implies some heavy-duty beer goggles. Assuming growth of 10 percent, Endemol should bring in 246 million euros ($288 million) of earnings before interest, taxes, depreciation and amortisation this year, in large part from selling reality TV shows in Britain, Europe and America. A $4 billion enterprise value implies a 14 times forward EBITDA multiple, or 21 percent above the average of listed production groups Entertainment One and Lions Gate Entertainment.

That’s admittedly an imperfect comparison, since Endemol arguably has greater clout to sell shows globally. Yet the peers are at least profitable, whereas Endemol made an operating loss of 21 million euros last year including one-offs and impairments, and generated negative free cash flow partly thanks to the high cost of servicing debt, which Moody’s pegs at 7.5 times EBITDA. If potential matches like All3Media, Lions Gate, Banijay Group or ITV decide such turnoffs merit, say, a 25 percent discount to listed peers, a marriage would set the buyer back under $2.5 billion including debt.

The better news for Apollo and Fox is that singletons have scarcity value. Fox and Sky have drawn competing bids from groups like Walt Disney and Comcast. Insecure traditional media players are bulking up to compete with intimidatingly large tech rivals Amazon and Netflix, who increasingly turn the heads of younger viewers. That’s inflating the going rate for content libraries such as Endemol’s, which includes high-quality dramas like “Peaky Blinders” and myriad reality TV formats including “MasterChef”.

Meanwhile, the Netherlands-based group’s specialism in such “unscripted” shows seems to have legs after hits like “Love Island” from ITV and World of Wonder’s “RuPaul’s Drag Race”. Both draw mammoth online audiences, overturning the conventional wisdom that reality TV has had its day. This should help Endemol’s valuation – even if $4 billion implies buyers spending too much time in the sun.

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