Entertainment One (ETO) has reached a multi-year production agreement with Mark Gordon to develop and produce content. The continuing alignment of his efforts with the group’s objectives is good news and removes any residual uncertainty post last month’s press stories. We have now updated our forecasts for the bond refinancing; the reduction in forecast interest costs results in uplifts to PBT and EPS for FY20e and FY21e of 4–5%. ETO is currently trading at a discount of around 7% to peers, based on our sum-of-the-parts valuation.
Mark Gordon was appointed president and chief content officer, Film, Television and Music at the time of eOne’s purchase of the 49% minority stake in his eponymous company in January 2018. In June this year, there was trade press speculation that he was leaving the group, which was quickly denied. The new arrangement means that he will focus his time on developing and producing content ie the core talent that built his reputation, rather than on administrative and managerial aspects. Steve Bertram, eOne's president of Film and Television, takes these over, working with Peter Micelli, chief strategy officer, Film and Television and Nick Meyer, president, Film. The new multi-year deal ties in future premium content from the Gordon stable and cements eOne’s royalty deals from heritage series from The Mark Gordon Company, such as Grey’s Anatomy and Criminal Minds.
In June 2019, eOne launched a new offering of £425m of senior secured notes out to 2026, to redeem its existing notes due in 2022 and repay the £52m term loan that part-financed the acquisition of Audio Networks in April 2019. The coupon on the new notes of 4.625% is considerably lower than that on the old notes (6.875%) and we have adjusted our forecasts to take this into account. FY20e PBT and EPS increase by 4%, while FY21e PBT and EPS rise by 5%. This is the only change to our numbers at this stage.
eOne’s share price has recovered from the setback around the time of the final results in June, when it briefly retrenched to 350p. Over the last 12 months, the share price has risen 23% as the content-based strategy has been better understood by the market. Our updated sum-of-the-parts analysis, based on EV/EBITDA averaged over FY20 and FY21e, implies a valuation of 476p/share (close to the 475p/share at the time of our last note in May), implying an unwarranted discount to peers of around 7%.