Kate Bulkley, Media Analyst.

Bob Builds a Future with Barney

By Kate Bulkley

The Independent

Feb 28, 2001

It was at this month's New York Toy Fair that Peter Orton first noticed his status had changed. When he walked into the booth of giant toy maker Hasbro, the red carpet had been rolled out. Surrounded by Hasbro-made Bob the Builder merchandise, Orton and his senior executives were greeted like arriving dignitaries. They had a private screening and even got lunch laid out for them. But Orton knew this wasn't all about Bob the Builder, his company's pre-school TV show that is already a big hit in the UK and, just last month, launched strongly on US TV channel Nickelodeon. Hasbro already has the license for Bob toys.

All this fuss at the booth was triggered in large part by a deal announced the Friday before the Toy Fair even began. That day Peter Orton's company HIT Entertainment announced it would pay 190 million to buy Lyrick Studios, the owner of Barney, a cuddly purple dinosaur that is an icon on kid's TV in the US. Barney's heyday was the early 1990s when his easy to sing-a-long tunes made him a sort of Elvis of the pre-school set. But even today he attracts 11 million viewers a week, and the continued sale of Barney merchandise makes him one of the most successfully licensed properties ever." What has happened is we have gone from being that very nice company of folks who do a number of shows, to being a company that owns Barney," said Orton in an early-morning call from New York during the Toy Fair. "And that is a different thing. There isn't another British company that's in that position at the moment." In the end, Hasbro lost out on the new Barney toy license deal. From 2002, Fisher-Price, a division of Mattel, will have the exclusive rights to develop new Barney toys and games.

Barney's new toy deal is part of Orton's grand plan to pump new life into old dinosaur, who some in the kid's TV business think is a has-been. In the weeks leading up to the Lyrick deal, Orton made sure Barney had new TV shows in the pipeline (40 more episodes are commissioned) a new broadcast TV deal in place (he'll be on PBS through 2007) and that Lyrick's loss-making book publishing operation largely for Barney books-- was closed down. It's been replaced by a deal with an outside publisher that has committed to a seven-figure sales guarantee. 'Buying Barney, much as I loath the creature, was a very clever thing to do,' says Adam Singer, the CEO of Telewest, whose programming arm Flextech was one of the first investors in HIT back in 1989. "(This deal) takes HIT to a whole new level. It's a great piece of real estate and it gives him a calling card in the US."

However, HIT's big leap into the US is a child's step in a land of giants like the Walt Disney Company. Orton thinks there is life in Barney yet, especially in international markets where he has been marketed less successfully. But Barney also comes with a well-oiled US distribution infrastructure for selling videocassettes and toys. Lyrick has long-established deals with big US retailers like K-Mart, Walmart and Target. Last year Barney sold 7.5 million videos through these stores. Orton thinks he can plug his other properties like Bob and Kipper, another HIT show, into this ready-made pipeline and kick-start sales of Bob and Kipper toys and games in the lucrative US market. "If we had to build up this infrastructure ourselves it would have taken 6 to 8 to 10 years," says Orton. The distribution machine is in place, but as one observer notes, "shelf space is great, but kids are only going to buy what they like".

By all measures in the UK kids business, HIT Entertainment has literally hit the big time. Already with an established reputation for producing quality TV shows for the youngest of TV viewers like Kipper and Bramley Hedge, over the last year HIT's Bob the Builder series has grown beyond its target pre-school audience to enter the UK mainstream. Bob the Builder's theme tune "Can We Fix it?" topped the singles chart over Christmas and its refrain "Yes we can!" became so well known that it began popping up in mainstream media. Even a report in The Sunday Times about the slowing US economy pictured Federal Reserve Chairman Alan Greenspan's head superimposed on Bob's body with the headline "Can he fix it?". Sales of Bob merchandise, from the CD, to toy trucks, to the Bob doll reached 60 million last year, which although it is only about half of what the BBC's show The Tweenies did in merchandise sales in its first year, is nevertheless a big milestone for HIT. "For TV companies like HIT the value is in finding a property where they use the TV broadcast to launch and expose other products like videos, toys and books because that's where the big money is," says Tim Westcott, author of a new study on the animation market for Screen Digest. "I don't think they created Bob just because it had a good toy line, but this is where they will make a lot more money because this is the reality of the TV business."

Bob is big, but even while the round-faced Mr. Fix-it was empire building in the UK, HIT's founder, CEO and head salesman Peter Orton was carefully weighing what would be the biggest deal HIT's history, one with the potential to move it from being a parochial British producer and distributor into the TV big leagues. Discussions began last November, but last month the decision to spend 76 million in cash and another 114 million in HIT shares for Lyrick was greeted by a near 6% jump in HIT's share price to 468 pence. "This deal is about 60% revenue enhancing for earnings per share for 2002," says Mark Savage, media analyst at Investec Hendersen Crosthwaite. "Our projected EPS to July 2002 becomes 10.4p rather than the previously anticipated 6.5p. This deal looks strategically and financially very sound." The deal with Lyrick also puts HIT head and shoulders above its peer UK companies. TV producer Gullane, formerly the Britt Allcroft company, which produces Thomas the Tank Engine, has a market capitalisation of about 200 million, half of size of the new HIT.

Meanwhile, UK TV producers Entertainment Rights and Winchester Entertainment have even smaller market capitalisations of 60 million and 80 million, respectively. The value of buying Lyrick going forward will depend on how well HIT absorbs and manages its new purchase. It will be a delicate and emotional affair. Lyrick has been run as a family business without normal financial checks and balances. For instance a $5 million loss in its in-house publishing business last year came as a total surprise to its owners. Dick Leach set up Lyrick in 1987 so that his daughter-in-law Sheryl could develop an idea she had for a kid's character. When Sheryl's purple dinosaur hit the small screen in 1992 on PBS, the US public service channel, it quickly became the biggest thing for pre-schoolers anyone had ever seen. "Barney was the first show that knocked Sesame Street off its top spot, but because Barney was really sweet and simple and totally directed at little kids, it was vilified by the kids' TV intelligentsia," recalls a former executive of Sesame Street. Under pressure from critics, PBS even took the show off the air until cries of protest from its affiliate stations that were being inundated with calls from irate parents forced it back on. Unlike the more worthy learning ethos of the Sesame Street shows, Barney had a lot of hugging and singing of simple, repetitious songs that drove many parents to distraction but that little kids love.

HIT's own beginnings were closely tied with Jim Henson, the gifted creator of Sesame Street. In the late 1980s Peter was running international sales for the Jim Henson Co. when Disney came with an offer to buy Henson out. That deal was never done, but with the blessing of Jim, Orton convinced the team at Henson International Television to "hold hands and jump off the cliff" and start an independent TV distribution company. Orton took the first three letters of the old division to give the new firm a name along with a respect for creative genus that he says he learned from Jim. For years HIT was a pure distributor selling series like Postman Pat and Alvin and the Chipmunks to broadcasters around the world. Selling nature series, which also have world-wide appeal, were added and then video sales. Always the consummate salesman, Orton would stand in the HIT booth at the programming market in Cannes, France chatting with the buyers and adding up sales on an imaginary cash register. "Ker-ching, ker-ching!" he would say, hitting the imaginary keys. "Those first five years were really special," said Jane Smith, today the MD of Entertainment Rights but in 1989 Smith was one of the original HIT team. "Peter understood selling better than anyone. He knew the importance of knowing your buyers and the importance of protecting your characters. And he knew how to close a deal. He was driven and he passed his enthusiasm onto everyone."

In 1997 HIT decided to take more control of its destiny by producing its own series, a decision that some felt was overdue. After raising 8.1 million in a secondary stock offer, HIT began production on three series based on classic children's books, Brambly Hedge, Percy the Park Keeper and Kipper. "We were setting out our store to create programming, but also to start putting in place the infrastructure of a studio to be able to exploit it," recalls Orton. In 1998 the company set up its own animation studios, where Bob would be born, and also added licensing and publishing. "With that we had in a microcosm what the major studios have," says Orton. Orton, who is 57, really enjoys what he's doing.

In New York for the Toy Fair, he sounded positively delighted to be having a breakfast meeting with the president of Brio, the maker of quality wooden toys, after a 6 am phone call from a London journalist. This just the start of a hectic day that, if typical, probably ended up with him getting five or six hours of sleep. Even at this pace, Orton says he is slowing down -he cites as evidence that British Airways recently revoked his gold frequent flyer card. "I think at some stage in the next 12 months we will probably make a decision to have me step up to executive chairman", says Orton. Losing Orton's day-to-day touch should be worrying for HIT investors because Orton's enthusiasm is such an integral part of the company. But he brushes off this concern saying that there are six people inside of HIT who could take over the top job, including two who have been with the company since its earliest days, Charles Caminada, head of world-wide distribution, and Rob Lawes, commercial director. "I've heard this talk about slowing down before," says Mike Luckwell, non-executive director of HIT and one of its biggest single investors. "He's always there. He's always travelling. I call him up and say 'Where are you Peter? 'and he says 'New York City' so slowing down is an exaggeration. But he also has built a good team around him, which is highly motivated based on performance."

Last week in London HIT held the press launch and screening of its newest series Angelina Ballerina, about a mouse who aspires to be a ballerina. Little girls invited to the screening had to be pried off the person in the pink-tutu-ed Angelina costume who greeted guests at the door, while the series itself is beautifully animated with lots of detail and lots of dancing. Dame Judy Dench is the voice of Miss Lilly, the ballet mistress, and her daughter Finty Williams plays Angelina. HIT has spent a lot of money on Angelina, more even than the 5 million that was spent to develop Bob. In terms look and depth of story line it's probably about as far from Barney as you could get. For that reason alone it is probably a wise decision to keep the creative team behind Barney in Texas while the home HIT team will continue to do what they do best. But that said, like Barney, Angelina already has licensing deals for videos, toys and re-issues of the books all in place and ready for the series launch on ITV in September. So maybe they aren't so different after all.

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