Why Canadian Entertainment Companies Put "For Sale" Signs Up in 2019

Scotiabank Theatre Toronto - Cineplex Entertainment - Publicity -H 2016
Courtesy of Cineplex Entertainment

The past year has seen several Canadian sector players, including Cineplex and Entertainment One, land on the auction block, amid a streaming era scramble for scale.

A slew of "for sale" or "just sold" signs went up for several Canadian small- and midsize media and entertainment companies in 2019, signaling a scramble for increased scale via mergers with larger global entities mirroring a recent Hollywood trend in the streaming era.

“We have seen this consolidation rush in Hollywood, and neighboring Canada has now also been swept up in it,” one banker told The Hollywood Reporter.

U.S. toymaker Hasbro in August agreed to buy up Entertainment One for $4 billion, marking the first major cross-border deal in what soon became a Canadian M&A frenzy.

U.K.-based Ashtead Group next acquired William F. White International, Canada's biggest film, TV and digital production equipment rental business, for $202 million in early December. The British equipment rental giant, which drives most of its revenues from its North Carolina-headquartered Sunbelt division, is entering the related film production equipment rental business as deep-pocketed Hollywood streamers and studios aggressively lock up studio space, talent and crews in Toronto and Vancouver.

And White has a buyer able to accelerate its streaming era growth strategy. "I needed to bring someone in who had the scale and scope to bring the company to the next level, but also ensure my legacy. I was able to find that, against the odds," White co-CEO and executive chairman Paul Bronfman told THR.

As the year drew to a close, U.K. exhibition giant Cineworld Group on Dec. 15 unveiled a deal to acquire exhibitor Cineplex — which has 165 cinemas with 1,695 screens and dominates the Canadian theatrical market — for $2.1 billion to create a movie circuit giant with over 11,200 screens globally and better able to negotiate movie deals with consolidating Hollywood studios.

"Having seen the stock contract from nearly $55 in May 2017 to a range of $22 to $26 for much of 2019, Cineplex's sale is welcome news as its next chapter inevitably had it being part of a larger entity," National Bank of Canada analyst Adam Shine said in a report as he pointed to Cineplex's undervalued stock.

The bottom line on the recent spate of dealmaking for Canadian sector companies is that buyers have been strategic and opportunistic as they pursue corporate strategies. A banker tells THR that in many cases the takeover targets being Canadian may have not been the driving factor for buyers, but the Canadian targets fit their strategic needs and were open to selling to a bigger acquirer. “I think each deal has its own reasons and merits outside of being Canadian companies. eOne, in particular, was a purely strategic acquisition," one banker argued.

More dealmaking could be in store in 2020 for players with Canadian roots. No one quite wants to commit these days when discussing where Lionsgate will land in the new year on the buy-sell axis, as the company, founded in Vancouver, has been seen potentially selling Starz as its premium cable channel goes online and international. Some analysts predict, though, that Lionsgate could also find an outright buyer.

"Lionsgate is a very logical merger partner with other midsize studios, including MGM and Sony Pictures, and a roll-up of these would be extremely attractive as an acquisition target, in our view," Wells Fargo Securities analyst Steve Cahall argued in a recent note.

In a buyer's market, Canadian broadcasters Corus Entertainment and DHX Media earlier put themselves on the auction block, only to pull down the "for sale" sign after failing to secure a deep-pocketed buyer. The hurdles for both indie broadcasters and producers is that in a highly protected Canadian media market potential buyers are often put off by stringent regulatory requirements.

"If you are a small- to midsize public company in the TV business in Canada, nothing will get easier unless you get some regulatory relief. Right now, a combination of the same regulatory burden as 15 years ago and diminished prospects, perceived or real, in the media space in general is not a great combination for investor confidence," Kaan Yigit, president of Toronto’s Solutions Research Group consultancy, tells THR.

DHX has changed its name to WildBrain and sold a $237 million minority stake in the Peanuts franchise to Sony Corp. to reduce its overall debut load and retain control of the popular kids brand. But only time will tell if the company will look for more deals.

Among other Canadian companies, Kew Media Group, which distributes the British drama Line of Duty, already said in mid-December that it was exploring a sale and other "strategic alternatives" after its CFO left the company after apparently reporting inaccurate information. 

What's more, Kew's senior lenders "provided notice of an event of default" under senior credit facilities, without as yet triggering repayment, the company said. The Toronto-based media company is headed up by CEO Steven Silver and former Alliance Atlantis Communications exec Peter Sussman, who serves as executive chairman.

Both Kew Media principals were not available for comment as "the company is actively engaging in discussions regarding a number of potential transactions," according to a statement. Kew Media in 2017 bulked up by acquiring six TV producers to avoid being outmuscled in a television market affected by cord-cutting and new streaming platforms.

At least one Canadian producer is resisting M&A activity, at least for now, and is instead attempting to meet the booming demand for series by major streaming platforms. Thunderbird Entertainment and Atomic Cartoons produced 101 Dalmatians and The Legend of the Three Caballeros for Disney+ and The Last Kids on Earth and Hello Ninja for Netflix.

"It's not that we're opposed to a merger or acquisition down the road," CEO Jennifer Twiner McCarron tells THR. "But we're focusing on good organic growth, focusing on quality and a culture where we can retain the best talent."

Georg Szalai contributed to this report.