The Indie TV Production Company Buying Spree: What’s Behind It? When Will It End?
A rash of acquisitions of European and U.S. independent production companies has been steadily spreading over the past year and a bit. One exec says, “We joke that there’s a transaction a day.” Leading the charge is the UK’s ITV, which has been on a shopping spree since it first bought a controlling stake in Duck Dynasty maker Gurney Productions in late 2012. Also acquisitive has been the Pro Sieben-owned Red Arrow, which recently bought Say Yes To The Dress maker Half Yard Prods. But it’s a two-way street: NBCUniversal already owns Downton Abbey producer Carnival Films in the UK as well as Monkey Kingdom and Chocolate Media, among others. Warner Bros last month entered an agreement to take over the global interests, outside the U.S., of Dutch company Eyeworks, and has a majority stake in UK production group Shed Media. Core Media is also known to have its eyes open to UK purchases. What’s more, many of these outfits also own companies in the hot Nordic region. And now there’s word that giant FremantleMedia may be moving in on vast group All3Media. A TV industry exec says, “We had the super-indies and now there’s a new breed of mega-indies.” If FremantleMedia acquires All3Media, it would create what an observer describes as “a very big beast.” Fremantle is a large group with significant turnover and some of their properties are getting older, an exec suggests. “It’s very difficult to replace that scale just through new productions.” However, I’m cautioned that should a deal be done, it won’t be in the imminent future.
So what’s been driving all this consolidation and cross-pollination? For one, with TV channels proliferating in the U.S., whether it be via basic cable or digital platforms, foreign outfits see a prime opportunity to establish a foothold and build scale. In the reverse, U.S. companies moving into the booming UK production sector know that broadcasters are doling out a lot of cash for original content. “There is a very rich commissioning opportunity added together with a significant amount of spend by the BBC, Sky and others,” one UK-based exec says. Indeed, Sky alone has committed to ponying up £600M per year on original British content. And, with the closure of BBC Three, BBC One is gaining an extra £30M for drama. The Scandi market is of obvious interest given the hits that have come from there both in their original language and in adapted versions like The Killing. The strategy there could be summed up as an effort to keep things more lucrative by keeping them in-house. With a lot of content floating around inside some of the bigger companies, it makes more sense to produce those shows in local versions via their own shingles. Scandinavia, Israel, Turkey and Holland are also on the map “because the creativity coming out of there is gaining attention from the rest of the world, so they’re good places to generate IP and maybe own it,” an exec says.
Owning the IP is a big issue. In the UK, there is a very favorable rights regime for original productions where content makers can retain a hold in both format and tape. One exec calls the UK “rights heaven,” noting, “You sell a show and you get to own it.” Things are drastically different in the U.S. where reality series rights, owned by independent producers in the early days of the unscripted invasion, are now being retained by the networks across the board. (U.S. scripted series are predominantly backed by studios.) However, execs are somewhat less concerned because the license fees paid by networks are much higher so the margins are more attractive. Also, as one exec says, “If you do manage to create something in the States that gains ratings, the world will sit up.” Another adds, the U.S. is “the scale play. Nothing matches it.”
But because of the rights issue, a big concern is: What are these companies actually buying? There are often earnout clauses integrated into acquisitions deals. Because the TV format business can be so talent-dependent, what happens if the people who built the businesses leave at the end of four or five years? One exec says about 50% of the principals are out the door after such a term. “If you knew that going in, how would that affect your decision making?,” this person wonders. In the U.S. in particular, if you don’t own the library as is the case with the vast majority of the recently acquired reality production companies, “you’ve basically given away rights, and the primary talent is off to the beach.”
Jan Frouman, who is group managing director of Red Arrow Entertainment which owns Kinetic Content, Fabrik Entertainment and Left/Right Prods in the U.S., calls the “people problem” the “biggest overhang in terms of risk.” He says, “We try to do sensible acquisitions that keep a lot of incentive in the future and try to do fairly longterm deals.” Mitigating the risk comes by owning the assets at the end and having a succession plan in place. Leaders at production companies are not just a “one or two man show,” he says. “There’s the development team, the production team… We need to make sure the next layer of management is progressing to where they could be in a position to take over.”
Red Arrow’s strategy is to “partner with really good creators and producers who are in markets that we think really matter.” He calls the U.S. the most interesting standalone production market. “The rest of the world pays attention to creations coming out of the U.S. and as such there are ancillary benefits that are very real when you invest in a U.S. company.” The upside, he says, is a “mixed bag.” The initial thinking is a “belief that a company can continue to grow via more output license fees, and that, in-and-of itself, makes the valuation for a deal sensible.” On the rights retention issue, he agrees that the U.S. is a challenging marketplace. “That doesn’t mean it can’t happen… you try to retain what makes sense.” For example, Red Arrow produces The Taste for ABC in the States (via Kinetic) and controls the international distribution. They were able to do that by forming a plan from day one. But, “We’re not dogmatic about it. We don’t feel we have to own every show we produce. We can’t justify the economics if the deficit financing required is well above what can be recouped in global sales. If you’re doing that, then it’s just pride, not business sense.” Red Arrow will continue to be “selectively aggressive,” Frouman says. “I have no interest in feeling great about some scale today only to feel awful about the nightmare I’m dealing with tomorrow.”
ITV, which is arguably the most active on the acquisitions scene, has in the past year or so taken controlling interests not only in Gurney but also such outfits as Teen Wolf producer DiGa Vision; Cake Boss maker High Noon; Hatfields & McCoys producer Thinkfactory Media; and UK companies So Television, The Garden and Big Talk.
On a recent earnings call, ITV boss Adam Crozier said, “In the U.S., our revenue doubled in the last year and has tripled since 2010 and we are now a top five content company in the U.S. We are also focused on the UK, and if you look at our acquisitions, they produce a lot of content for other broadcasters, and our revenue off-ITV was up 56% last year. It is all helping us to grow on top of organic growth.”
An analyst I spoke with believes that ITV is moving in the right direction. “Just as properties are collapsible, they also have growth potential. I think they’re looking very carefully.” This person believes people are “fairly bullish on ITV.” The group is “growing organically via ITV Studios as well as through acquisitions.” Indeed, the group had 20% growth this year, about half of which was organic and the rest via acquisitions. For the big groups, “if you’re a good broadcaster or content supplier, if you can get the synergy going then it’s a good thing. If ITV Studios is really doing good, then it benefits the in-house commissions.” In a changing advertising market, it’s also good business sense to spread risk. “If advertising turns nasty, you are less severely affected. The uncertainty of ad trends is a big reason why a lot of the companies look at other properties. They reduce their reliance on advertising as a revenue source, so there’s a strategic reason for growing other business areas.”
The acquisitions wave will continue for a while, an exec says, and then will come the fallout. “Every big deal is usually followed by departures and those yield new companies — and those yield new deals.”
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