eOne Stock Jumps on Rejected ITV Bid, Analysts Discuss Possible Sweetened Offer

Adam Crozier, CEO ITP

The U.K. TV giant touted the proposed combination and its "strong strategic rationale," but some observers questioned if it would be willing to pay up for a company with a big indie film distribution business.

With indie film and TV distributor Entertainment One on Wednesday unveiling that it has rejected a £1.03 billion ($1.3 billion) takeover bid by U.K. TV giant ITV, analysts immediately started discussing whether a sweetened offer could materialize.

ITV touted the proposed combination as having a "strong strategic rationale" as it continues to expand its business overseas, but some observers questioned if it would be willing to pay up for a company with a big indie film distribution business that may be outside of ITV's core competency.

If the deal goes ahead, it would mark one of the most ambitious additions to ITV's stable after a string of major acquisitions in recent years.

An ITV rep declined to comment on the 236 pence per-share offer for London-listed eOne beyond a statement in which it confirmed the approach as part of a continuing strategy "to build a scaled international content and global distribution business, with a focus on U.S. scripted content."

Shares in eOne on Tuesday jumped 23 pence, or nearly 11 percent, to £240.50 on news the Canadian company was in advanced takeover talks with ITV.

That followed eOne's board rejecting the £2.36 per-share offer as too low, and analysts questioning whether the U.K. TV group, seeing a bargain in eOne, may want to sweeten its offer.

"We think ITV may not be prepared to pay the £3-plus per share that we believe many eOne shareholders want," Liberum Capital analyst Ian Whittaker told The Hollywood Reporter.

ITV's current offer for eOne represents a 47 percent premium to eOne’s average share price since it first emerged as a rumored target of the U.K. TV group six months ago.

The Downton Abbey broadcaster will need to raise its offer to secure the support of the Canada Pension Plan Investment Board, which acquired a 17.9 percent stake in eOne in September 2015 at £2.69 per share to replace equity fund Marwyn Value Investors as the company's biggest investor.

A representative for the CPPIB offered no comment Wednesday on its next move after rejecting ITV's latest approach.

As the dust settles on the deal, Peel Hunt analyst Malcolm Morgan agreed there are benefits in eOne helping ITV broaden its push into global production after an earlier deal for The Voice creator Talpa and picking up stakes in a succession of production houses in both the U.K. and the U.S. to expand the ITV Studios arm.

But Morgan questions why ITV needs to pick up a company dependent on releasing indie movies for most of its revenues.

"Film distribution is less obviously ITV's heartland," he said, as eOne in recent years has looked to TV production and distribution to smooth out its earnings stream.

ITV as a broadcaster is expected to spin off the Canadian and U.K. Hunger Games distributor's film group. eOne has distribution operations in Canada, the U.K., the U.S., Australia/New Zealand, Spain and Benelux.

eOne's film business is being valued at north of $200 million, given the 2013 valuation when Alliance Films was acquired from affiliates of Goldman Sachs Capital Partners and Investissement Québec for around $228 million.

Possible bidders for eOne's movie distribution arm include Elevation Pictures, which has backing from Teddy Schwarzman's Black Bear Pictures and former Alliance Films head Victor Loewy as its chairman.

Morgan added ITV will likely spin off eOne's popular Peppa Pig children's franchise, in which eOne is a majority owner.

"Peppa would be very popular if ITV sought to sell it on," said Morgan. "Licensing and merchandising and children’s IP might be more valuable to someone like Disney than someone like ITV."