UK: Television Highlights

Last Updated: 13 January 2009

Article by The Corporate Team

It is a time of great change for the independent television production sector, as revenues soar and companies merge. NBC Universal's acquisition of Carnival is typical of this consolidation trend.

Glamorous industries like the media rarely compete with established blue-chip companies or heavy industrials when it comes to attracting investors. But, as the economy stumbles and previously 'safe' investments such as banks look decidedly wobbly, investors are looking for areas of growth. One sector that is prospering is independent television production so private equity firms and trade buyers are looking keenly for investment targets.

In September, NBC Universal (NBCU) acquired Carnival, behind programmes such as the BBC's Hotel Babylon, in a £30m deal. Carnival chief executive Gareth Neame says: "There is a huge amount of consolidation in the media business. This is a vibrant area and sales of small companies mean there is a lot of consolidation. A key area is scripted television – get it right and it makes money."

Merge and grow

Industry figures show revenues in the independent television production sector are on an upward climb, rising from £1.6bn in 2005, to £1.95bn in 2007, and are now at £2.14bn. The Independent Production Census figures suggest that increased commissions from UK broadcasters generated the majority of growth. Spending by broadcasters such as the BBC and ITV is up by £156m compared with 2006.

And as spending has risen, consolidation has increased: in 2006 just 10 companies accounted for 60% of the independent production sector's revenue base. This looks set to continue – according to trade body PACT, a third of all companies in the £5m to £10m bracket said they planned to merge.

Already there is a complex ownership structure as the result of consolidation. Shine Group, for example, now owns Princess Productions, which produces The Wright Stuff and The Sunday Night Project; as well as factual programmer Firefly; Kudos, which is behind Life on Mars and Spooks; and Reveille, which is behind The Office. Also, Endemol snapped up a controlling share in US company 51 Minds Entertainment earlier this year.

Private equity players include Apax, which invested in HIT Entertainment, the company behind Bob the Builder and Thomas the Tank Engine, and LDC, which acquired Picture Production Company – which specialises in trailers for the film industry – from Royal Bank Equity.

New climate

But, as the economic backdrop has changed, it is becoming harder to nail down those deals. Certainly, Neame believes this to be the case. The Carnival deal marked the end of 18 months of negotiations for Neame, who says the deal was delayed in part because of the difficulty of raising debt in the market. "Within our sector, business is quite tough at the moment," he says. "It is not a good time to sell. Our deal started some months ago and the timing was okay."

Under the deal, NBCU acquired 100% of the company, paying between £20m and £22m for majority stakeholder Southern Star's 75% stake and its library and distribution of Carnival's shows. Neame says: "The strategic reason behind the sale was that it was a hard time to be a small production company with annual sales around £25m and doing it all on your own. It is tough when trade buyers are acquiring all your competitors. You create something bigger and better by joining forces. This is a difficult time and we wanted that strategic advantage."

Carnival was advised by Rosenblatt, which started working with the television producer when it first began negotiating a sale in early 2007. Elizabeth Larkins, who worked on the deal for Rosenblatt, already had experience of similar media deals. When TWI, the world's largest independent producer, bought Darlow Smithson Productions (DSP) in 2006, Rosenblatt acted for John Smithson, DSP's founder, who, along with some minority shareholders, sold the entire share capital to TWI. DSP is a factual independent production company that produced the film Touching the Void.

Larkins and Tessa Laws also acted for Lion when its shareholders sold the entire share capital to All3Media. Lion produces programmes such as Castaway, while All3Media is well known for Midsomer Murders and Richard & Judy.

"The experience of working on several TV production deals, including the sale of both Darlow Smithson and Lion Television, was invaluable when acting for Gareth," explains Larkins.

Neame says that though Rosenblatt's media experience was important in the Carnival deal, it was the firm's track record in M&A work that was crucial.

"I made the mistake in the past of working with lawyers who are media experts and know about the mechanics of my business. But that does not make much difference," he says. "It is about working with a good team of M&A people who understand about buying and selling companies."

Although M&A departments are generally seeing a slowing of business, the independent television production sector still provides opportunities – the trick is finding them. "Companies out there buying other companies are talking about limited supply of targets," says Neame.

Hungry for consolidation

Buyers want companies like Carnival, which has a bank of intellectual property rights as well as its new material. "We are 30 years old, which is an advantage," explains Neame. "So we have a new business and IP that has value. You can't get that off the shelf."

Neame says the current market is hard to predict, but he anticipates consolidation among television production companies will continue as far as the current economic crisis will allow it.

Certainly, NBCU anticipates making further acquisitions in the UK. The company has spent $700m in the past year building its international business, and there is more cash available for further acquisitions. It has already bought Sparrowhawk Media, the owner of the Hallmark Channel, and indicated the deal would be followed by a string of acquisitions of independent British producers.

"This really represents the cornerstone of what NBC wants to do outside the US," says Angela Bromstad, the president of NBCU international television production. "The UK is a huge market with a very large talent pool. We will continue to grow our UK production business in comedy and non-scripted."

It seems that the economic squeeze has not dampened the public's interest in being entertained. "The corollary should be if you are good you could get a good price and good money," says Neame.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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