The City gave its verdict on a mooted bid by ITV plc (LON:ITV) for Peaky Blinders and Big Brother maker Endemol Shine as almost £270mln was wiped from the value of Britain’s largest commercial broadcaster.
ITV topped the FTSE 100 losers’ list, falling 3.4%, following reports linking it with the heavily debt-laden, private equity-owned production house, which is valued at around £3bn while bids are expected to be in the range of €2bn and €2.5bn (£1.8bn-£2.2bn).
Analysts seem to be echoing the sentiment amongst investors, or at least putting it into words, with Deutsche Bank highlighting that the valuation for an asset with such a mixed operating record was “challenging”.
This has been pointed out by the fact that several bidders for Endemol have already walked away, Deutsche said, adding that a deal of this size would involve a “material increase in leverage and/or a capital raise”.
The key rationale behind the purchase would be synergies and an increased throughput from the ITV Studios arm thus producing more original content.
However, Deutsche warned that this hedge of more original content against an inflation in programming costs, particularly if synergy benefits take time to materialise and result in short-term costs, could be difficult to pull off.
Debt and Endemol’s mixed performance weigh heavily
Various sticking points include Endemol’s debt levels and its mixed earnings record, as last year it reported an operating loss of €21mln and was also dealt a blow last week when Channel 5 said it would axe Big Brother from the schedules.
Yet another push to streaming?
Neil Wilson, chief market analyst at Markets.com, says the move is indicative of ITV’s push to build out its content production arm, a key goal of chief executive Carolyn McCall who took the helm in January.
“There are probably smaller production companies that might be more appropriate” Wilson said, adding that the purchase would not be a mere bolt-on but a massive undertaking.
He added that the move points toward a strategic shift toward what he says would be “a Netflix-type” model for the company that would form a larger share of its revenues and move it away from the traditional cycles of TV advertising.
“It’s a strategic pivot that she [McCall] is undertaking and Endemol is maybe not the absolute best option but it seems to be that the strategy is to go down the streaming route more” Wilson added.
The bid also feeds into the overarching narrative that broadcasters are increasingly scrambling to bulk up their content development arms and streaming services in a race to catch up to giants like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN).
ITV has already begun licensing out some of its content to Netflix, with its back catalogue of hit reality series Love Island appearing on the platform, suggesting that the broadcaster may be wanting to be feeding new content to its established audience rather than pushing to take a slice of the more cutthroat streaming market.
With Endemol’s catalogue of successful series, this could be leveraged even more if ITV takes control.