Kate Bulkley, Media Analyst.

A happy ending for Mr Grumpy?

By Kate Bulkley

Broadcast News

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For Broadcast September 29, 2011

Chorionís assets deserve an appreciative home, says Kate Bulkley.

Last week, the first parts of beleaguered media rights business Chorion were sold off to former chairman Lord Waheed Alli.

That he bought animated underwater explorers The Octonauts and The World of Beatrix Potter barely a month after quitting speaks volumes about the value he sees in these properties.

The rest of debt-ridden Chorion is also on the market, as its private equity owner 3i looks to find new homes for Mr Men, Paddington Bear, Enid Blytonís Noddy and the literary estate of Agatha Christie.

Those sales will be used to pay off the banks that hold Chorionís £70m debt, which dwarfs its cash flow - reportedly just £5m in its most recent financial year, and a third of what it reported a year earlier.

So are the Chorion assets no good? Or have the right deals with broadcasters, toy companies and DVD sellers not been done? Or is the problem the financial structure? Maybe there has been some poor management or missed opportunities, but I bet (and Lord Alli must agree) that there is value in its properties.

In 2006, before 3iís investment, a former member of the Chorion management team told me he was wary of private equity because it leverages companies and uses all available cash flow to service the debt.

If a company is growing at a healthy clip and throwing off a lot of cash, the structure works pretty well. The problems come when things arenít in permanent growth mode, because there is no equity buffer to absorb any strain on the business.

Properties like Chorionís - or any other UK IP owner, such as Hit Entertainment (Bob The Builder; Barney The Dinosaur), Entertainment One (Peppa Pig) and Coolabi (Bagpuss) - need investment to keep?them relevant and marketable.

Creating a new animated series is expensive, so good luck getting a broadcaster to pay for it. The childrenís channel business is fragmented, the DVD business is a fight for shelf space and margin, while the digital exploitation business online is nascent.

At a certain point, merchandise exploitation is better managed by a big toy player, which is one reason why Hit Entertainment is talking to US toy maker Mattel about a deal to sell its assets, including Thomas The Tank Engine and Bob The Builder.

When 3i bought Chorion in 2006 (at a high multiple of 19.3 x the companyís 2005 EBITDA) the idea of private equity growing the business was very sexy. In late 2009, Chorionís books looked healthy, with a production deal with ITV for eight screen adaptations of Agatha Christie novels featuring Miss Marple and Hercule Poirot.

But the 12 months to March this year were not so lucrative, and 3iís banks have become Mr Grumpys.

On a positive note, I imagine the Chorion assets will sell. Coolabi has looked at buying the Agatha Christie estate before, and is itself in the middle of a £4.2m deal to be taken private by its biggest shareholder, a media investment fund called Edge Performance VCT.

So the wheel will turn and these classic properties will likely be bought. Letís hope they are invested in and managed properly so Mr Grumpy ends up more like Mr Happy.

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