The lucrative business of character licensing has always been associated with big US companies such as Disney, but now smaller British players are getting in on the act. By Kate Bulkley

The business is character licensing and distribution. Licensing alone, which includes everything from videos to T-shirts to plush toys, is worth $175bn worldwide and growing at a steady drip of about 7% year on year, according to Brett Savill, an entertainment and media partner at PriceWaterhouseCoopers. "Hit Entertainment [the owner of Bob the Builder] has obviously led the way in the UK," says Savill, "but there are now a bunch of smaller companies that are attracting attention."

Whether it's Mickey Mouse, Miss Piggy, Bob the Builder or Hercule Poirot, these characters are hot properties. Their success has built the share prices of their owners and their power to attract audiences has caught the eye of big distribution companies like Comcast.

And as their value has gone up, the competition among these companies has increased. Earlier this month, the deadlock finally broke between Entertainment Rights (owners of Basil Brush) and Chorion (which holds the rights to Enid Blyton's Noddy and Agatha Christie's Hercule Poirot whodunnits), which have been locked in a bitter takeover struggle since last autumn. Any chance of a deal finally fell through when Chorion's board rejected ER's share offer, which valued Chorion at £43.5m. But the hunt is not over: Chorion is now looking to pay an estimated £25m for the Mr Men franchise from the family of Roger Hargreaves.

The stars of Will and Grace

At the lower end of the scale, Contender, whose flagship character is Tractor Tom, last week bought Medusa Communications and Marketing Ltd, the UK's leading distributor of Jackie Chan kung fu videos, in a cash deal reputedly worth £8m. Together Contender and Medusa (which also owns the life-of-series UK video rights to hit US TV series Will & Grace) will reach total turnover of £24m and, because both companies were profitable, the newly combined Contender expects pre-tax profits of £4m to £5m by mid-2005.

"If you're going to grow, you have to square up, not just with the minors, but with the bigger, uglier companies like the BBCs of this world because to get anywhere you are going to need more market share," says Richard Bridgwood, 38, chief executive and founder of the nine-year-old Contender.

Bridgwood launched Contender after learning about the TV programme distribution, licensing and creation business as a fairly low-ranking field executive at hugely successful Hit Entertainment. So it's not surprising that the template he used to make Contender into a contender is based on Hit.

Tractor Tom

Tractor Tom is no Bob the Builder, but the animated farm vehicle's debut on CiTV last year helped sell 11,000 videos in the first week - the biggest first week sales figure for a CiTV show in the past two years - and Hasbro has bought a licence to sell Tractor Tom toys in the US later this year even without a US broadcast deal in place.

Last year, Bridgwood felt that Contender needed a "step-change" in order to grow, but decided against a public share listing because Contender didn't have "the momentum or the weight to do that".

Bridgwood found his solution at a dinner party, where he met David Hodgins, Medusa's co-founder. The two had their first formal discussion in October 2003 at Mipcom, the TV programming market, and the deal was signed after an all-nighter last week.

Hodgins and his partner Stephen Rivers get a cash exit for Medusa (they will stay on as non-executive directors), while Bridgwood has new-found financial firepower from Medusa's strong video distribution business. "We have a whole lot of TV output for which we have video rights like Spooks, Bad Girls and Footballers' Wives," says Bridgwood. "But the strategic plan is to build a portfolio of our own pre-school properties to add to Tractor Tom and Peppa Pig."

Peppa Pig

Peppa Pig, which was originally developed by independent producer Astley Baker Davies but now is controlled by Contender, is scheduled for a May 31 launch on Five, with a subsequent launch on Nickelodeon UK. Contender is in the process of developing Mojo Swoptops, an animation about a little truck, and has several other ideas.

Taking another page from the Hit playbook, Bridgwood already has his eye on the US market, where he would like to buy the rights to Dick and Jane, the US equivalent of Janet and John, the UK reading scheme from the 1970s, which Contender owns. "The owners of Dick and Jane are a subsidiary of Pearson and they wouldn't even take a meeting, but we'll keep trying. We're sticklers that way," said Bridgwood.

Hit's move into the US came in 2001 when it bought Lyric, the company behind Barney the Dinosaur. Hit's founder and chairman Peter Orton, ever the deal man, had some advice for Bridgwood. "He should float the company as soon as possible and buy some brands and then move out of the UK and into the US because that is where the real business is," said Orton. "The distribution business is quite fragile now and it will be overtaken by video-on-demand and broadband and that is a threat to all of us who need to make sure we can get our content broadcast and distributed."

Sage advice that will probably be listened to closely at the Contender offices.

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