Thunderbird Entertainment (TBRD) - an imminent sale?
This is a simple idea and a revisitation of an old friend - one I used to own in my P.A.
A ton of ink has been spilled on Thunderbird (TBRD), the same regular regurgitations - the company is too cheap, doesn’t deserve to exist in public markets etc., - which are all true and fair, though oft posited way too prematurely. The stock has languished over the last couple of years and a series of events have taken place, which I believe leads us now, close to the end, whence TBRD will cease being a public-listed entity.
Just for a quick background, TBRD is a Canadian entertainment studio operating three different business models:
Intellectual Property (IP)
Content is 100% owned and stored within TBRD’s library
Content is sold to streaming platforms e.g. Netflix for a predetermined period and then resold again to other platforms. Rights to merchandise can also be sold in exchange for royalties.
E.g. Highway Thru Hell, Kim’s Convenience, The Last Kids on Earth
Service Production
TBRD is hired to execute on a movie or a series
Project fully funded by hirer with a producer fee on top
E.g. My Little Pony, Trolls
Service-Partnership
Typically for Atomic Cartoons, TBRD’s animation studio.
A client brings a project to TBRD and TBRD handles the entire process from the writing to post-production.
Similar to service production, all costs are fully funded with a substantial producer fee on top and in this case, a percentage of back-end sales of consumer products, merchandise etc.
E.g. Princess Power, Hello Ninja, Dogs in Space
Service production gross margins are typically in the 20-30% range with EBITDA probably somewhere HSD, LDD. The service-partnership segment should generate slightly higher margins given ancillary royalties. Margins tend to be seasonal and follow a curved function - as the project enters mid-cycle, due to increasing use of labor, TBRD, being a Canadian studio, earns larger tax credits which boosts margins (will be covered later). Lastly, the IP model’s margins are positively correlated with the “life” of a show - margins could easily be in the high DDs but it’s very hit/miss and revenues/expenses are only recognized upon delivery which further exacerbates the seasonality of the P&L which may explain the variability of acquisition multiples across the industry.
While revenues have grown impeccably (think >30%) over the last few years, margins have taken a hit as TBRD has pursued higher budget scripted shows that typically come with a lower margin despite similar fees (hence revenue growth remains intact). This is one of the reasons why the stock has languished; other reasons include the global deceleration in content spend which albeit slower, given the higher cost of capital environment, is still nonetheless, poised to grow in coming years, given the sheer amounts of players competing for limited attention. Last but not least, TBRD is relatively illiquid; TBRD.V trades on average, around 200k CAD worth of stock per day; the only solution would be to 1) expand potential shareholder base via an uplisting or 2) conduct bolt-on acquisitions to expand the market cap. With regards to the former, a tradeoff would be higher listing fees with no guarantee of an improved cost of capital and for the latter, it would be piss poor capital allocation to use cheap currency in acquisition of expensive assets. In sum, TBRD is stuck between a rock and a hard place and frankly, the firm should be subsumed into a bigger entity with a lower cost of capital.
In fact, Brian Paes-Braga, the ex chairman of TBRD, who was a vocal bull on TBRD’s potential, stepped down end 2021 and sold out his shares. Brian made his fortune partnering with Frank Giustra to start a lithium resource company before selling it in 2018. It is my hypothesis that Brian wanted to conduct a similar playbook here but Frank was not so enthusiastic about the idea, preferring to empire-build i.e. Lionsgate 2.0 - hint: management has been reluctant to repurchase stock and has been talking acquisitions in past calls.
Thankfully, Voss Capital, which owns a 13% stake, sees the need for change and has pushed for value realization recently. The series of events are as follows
Nov 18 2022 - Voss starts a proxy fight with TBRD
Key points:
Entrenched board not interested in selling company
Peers e.g. Hasbro putting eOne (excluding key IP) up for sale
A key concern here may be the length of time it’s taken for Hasbro to sell those assets but it’s worth noting that in this case, Hasbro is keeping the valuable IP (Peppa Pig and PJ) which may have unnecessarily stifled the process.
Still,
Q4 22 - Hasbro mentions “strong interest in these valuable assets”
Q1 23 - Hasbro mentions providing an update in Q2
Marni Wieshofer, CFO of Lionsgate (LGF), joined the Board in 2020 due to her relationship with Frank Giustra and not out of competence
Voss plans to elect nominees with media M&A expertise to help with the sale process
Dec 14 2022 - Voss pens a letter pushing for change, arguing again that the presence of Frank and Marni has stifled value creation at TBRD. Incidentally, when Frank and Marni stepped down from the Board and CFO role respectively at LGF in 2002-2003, LGF proceeded to quintuple in subsequent years.
Jan 19 2023 - TBRD announces cooperation agreement with Voss
Key points:
Board agreed to form advisory committee to assess strategic opportunities
Marni and Frank steps down.
Voss puts forward two board nominees with M&A experience and one was previously involved in eONE, during which Hasbro acquired the firm.
March 29 2023 - Lisa Coulman joins the Board. Lisa is the CFO of Nobul Technologies and oversees M&A transactions.
To top off the sequence of events, just a week back, TBRD announces the appointment of ACF Investment Bank to (my emphasis) - “evaluate any inbound expressions of interest received by the Company”. ACF seems to be a reputable I.B in this space (worth perusing their website) and the wording of the document seems to indicate the existence of interest, which bodes well for an imminent transaction.
To summarize, TBRD has i) refreshed the board with an aligned strategy of conducting a sale and ii) has retained ACF to aid in achieving a transaction.
The expression of inbound interest, to me, is not the least bit surprising. TBRD owns some
Valuable IP especially on the children’s programming side e.g. Princess Power ranked #8 on Netflix kids chart in the US, days after its premier.
Canadian studios enjoy government tax incentives lowering the bar of affordability for high-end production
Valuation
From an LGF Q1 23 call
LGF has stated multiples in the range of 15-17x for studio + IP transactions . This was mentioned 9 months ago and while I might have scoffed at those multiples as unachievable then, I genuinely think the environment is better now given the amount of deals being done lately. While tangential at best, a prime example would be gaming acquisitions e.g. NGMS just received a ~100% premium bid and SciPlay was also just offered a nice premium - all right after a banking crisis. Moreover, even amidst a volatile 2022, deals were still done in the film studio space - Netflix’s acquisition of Animal Logic, Nintendo’s acquisition of Dynamo etc.
What could TBRD be worth in an acquisition? TBRD earned 20m of EBITDA in 2022 and guided to a lower EBITDA in 2023 due to production delays resulting from the proxy fight, pushing payouts into 2024/2025. Management mentioned in the Q2 23 call that 2 projects by 2 different buyers were postponed, though this was not due to any idiosyncratic receding demand from them. In other words, this is clearly a one-off event and the terms of an acquisition will definitely account for this.
Throwing some numbers in the blender, assuming a 25m EBITDA in 2024 and an 11x multiple, this gets us to a 4.96 CAD stock price, 35% above the last closing price of 3.65. Anything close to LGF’s guidance i.e. 15-17x is pure cherry topping the sundae.
From a public comps perspective, assuming 23m of EBITDA (~10% growth over fy22) could have been obtainable this year if not for production delays, TBRD trades at 9x EBITDA. WildBrain, using street guidance of 97m EBITDA for fy2023 and halving cash balance to adjust for production set-asides which to my knowledge, is not disclosed in their filings, prices the stock at 10.5x EBITDA, a full 1.5 turns higher than TBRD despite being in a net debt position compared to TBRD’s clean balance sheet. A few technical reasons for the relative valuation discrepancy despite both companies being more or less microcaps could be that i) WildBrain trades on the main Toronto exchange and ii) WildBrain has more analysts coverage given the debt-capital raising business it provides to investment banks whilst an unlevered TBRD is virtually useless and thus, ignored by the street.
For past transaction references, numbers are all over the place but a few headline transactions → Hasbro paid ~15x EV/fy19 EBITDA for eONE with most of the value within the Peppa Pig and PJ Masks IP. In the past, Dreamworks was acquired by Comcast for 24x EV/fw EBITDA and Pixar, back in the day, was acquired by Disney for 32x EV/LTM EBITDA.
As the sensitivity table demonstrates, multiples don’t have to hit these levels for money to be made - obviously Dreamworks and Pixar owned some exceptional IP but I don’t see why TBRD is any less attractive an asset given it has some good IP, sits on the low end of the cost curve, has some spare G&A to wring out (taking ~2m out or 10% of G&A is an incremental 10% to AEBITDA i.e. 2*10 = 20m of EV creation) has a lazy balance sheet and isn’t accorded an adequate cost of capital.
Risks
It’s taken a while for Hasbro to divest eONE so a sale may not be as straightforward as posited. Moreover, TBRD owns different studios that cater to different programming - e.g. Atomic Cartoons (self explanatory) and Great Pacific Media (GPM) which focuses on unscripted television; an acquirer looking to obtain expertise and human capital for cartoons may not necessarily want GPM.
Disc: Long TBRD