ETO has announced the acquisition of a 70% stake in ADB that will in effect lift its stake in Peppa Pig from 50% to 85%. The cost is £140m and is being funded by a net of expenses £194m rights issue. The rights issue is heavily discounted at 153p or 44% to last nights close. The excess funds are to provide flexibility to execute group strategy. Given the lack of cash generation and level of leverage this looks like a step in the right direction for the balance sheet. Concentration exposure to Peppa Pig rises further to c31% of group EBITDA after adjusting for material minorities. This level of concentration is a clear risk. We believe that Peppa is more cash generative than the rest of the group’s activities and therefore arguably its cash performance is more important in funding ongoing activities. Based on available information at this point and using FY16 numbers as a base line we would expect EPS to fall to c19p (vs 23p). We put our forecasts and TP under review ahead of the investor call at 9am.
