Analyst reaction largely positive to DHX review

An announcement by DHX Media Ltd. Monday that it is launching a strategic review that could see its board potentially sell off the company or its assets is an unexpected move, according to RBC Capital Markets analyst Drew McReynolds. “The initiation of a strategic review was a surprise to us,” McReynolds said in a late Monday note. “The company owns a variety of valuable content assets that could be of interest to what appears to be a proliferating pool of potential buyers.” The company, a producer and broadcaster of content based in Halifax, said the strategic review is intended to maximize shareholder value. It said it is potentially staring in the face a partial or full sale, a merger with another company or the sale of assets. “DHX Media’s Board of Directors is committed to fully evaluating appropriate strategic alternatives while simultaneously supporting the company’s management and employees in their ongoing efforts to deliver great and innovative children’s content and license the Company’s brands globally,” a Monday press release said. McReynolds noted that DHX “is in the right spot at the right time as a content producer targeting very attractive kids and family genres within a strong global content cycle.” Corus Entertainment Inc. is also in the family content business. Its CEO Doug Murphy has reiterated on past conference calls that his company is glad it’s not in the sports business, stating that its products aimed at women and families are highly valuable for the company. McReynolds added that DHX still has something to show after a weaker fourth quarter this year and said that while the move is “directionally positive,” he will “remain on the sidelines” and watch for sustained growth in the core content business and execution on its content strategy. The surprise reaction also comes despite the fact that the slower fourth quarter report in September forced McReynolds and Canaccord Genuity analyst Aravinda Galappatthige to downgrade their ratings for the company. Galappatthige, who viewed the news as a positive, said the company may pursue the asset sale option. He said the market would view the sale of the broadcast assets positively, which would also make it a “cleaner content ‘pure-play,’ as well as a genuine takeover target,” he added. “Given the size of DHX’s library, its production and distribution expertise and infrastructure plus a current positive operating environment, we believe there would be genuine demand,” Galappatthige said. For example, Galappatthige pointed to the kids product WildBrain, whose value, he said, may not be fully baked into its price. To illustrate, Galappatthige pointed to multi-channel networks such as DreamWorks Animation’s AwesomenessTV and Walt Disney Co.’s Maker Studios, which generated “exorbitant valuations,” to back that argument. He added a minority sale could highlight its underlying value. In a September note after DHX’s fourth quarter, Galappatthige pointed to WildBrain as “the standout positive” with “audience growth spiking exponentially and the operation very effectively leveraging data to build new content and target audiences.” These potential valuations are high despite declines in its Family Channel in recent years, which Galappatthige said has dragged DHX’s results. However, he noted that the channel could be a useful asset “alongside a multi-channel media group, which would be better positioned to derive synergies and reformat the network.” Late last year, the CRTC approved advertising for the channel, which Galappatthige said at the time was “clearly positive.” In August, Galappatthige wrote in a note that DHX could potentially benefit from the news that Walt Disney Co. was pulling its distribution deal with Netflix Inc. and setting up its own streaming service. Galappatthige said the move could elevate the role of independent producers like DHX while opening the door for “potentially larger licensing deals both in terms of original content as well as library sales.” In his own note on Monday night, National Bank Financial analyst Adam Shine said a partial sale of WildBrain would add to his valuation of the company. He added that despite being considered non-core and expected to be sold in the future, DHX’s broadcasting assets provide critical free cash flow for ongoing operations. But Greg MacDonald, an analyst at Macquarie Capital Markets, said in another note earlier this year that broadcasters will “continue to see either cost increases to create their own content/pay up for rights, revenue pressure as audience fragments, or both,” in light of recent moves by streaming services coming into Canada. As for if the company were to sell, some analysts said the company could very well go to a foreign suitor, provided it sheds its broadcast assets to be onside of foreign ownership rules. David McFadgen, an analyst at Cormark Securities, said in a Tuesday note that the sale of the company to a non-Canadian would be “problematic.” He said ownership of the Family Channel must be majority controlled by a Canadian, a requirement to access tax credits and other government initiatives for new productions. McFadgen, who said Corus could be interested in DHX, pointed to how the company finances its production budgets, a “significant portion” of which comes from federal and provincial government agencies and incentive programs, including the Canada Media Fund and tax credits. “Canadian broadcasters would be less interested in new DHX programming if it was not Canadian because this could prevent them from fulfilling Canadian Content requirements and potentially accessing government incentives.” — With reporting by Ahmad Hathout at ahathout@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Analyst reaction largely positive to DHX review

Broadcast | October 2, 2017

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Analyst reaction largely positive to DHX review

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