DHX Media’s Special Committee of its Board of Directors has concluded its Strategic Review. The process has included the signing of a multi-million-dollar agency agreement for Peanuts in China and Asia with CAA Global Brand Management Group LLP (a division of Global Brands Group), which follows the sale of a minority stake to Sony for $235.6 million (US$178 million). DHX has also refocused its content strategy to prioritize investment in WildBrain, and the development of premium content for major streaming services and broadcasters.
Additionally, the Board of Directors has suspended the Company’s quarterly dividend, effective immediately, freeing up approximately $10 million in annual funds, to invest in our rapidly growing WildBrain business and to continue paying down debt.
“The Strategic Review marked the end of an important stage in the evolution of DHX Media. In the first stage of the Company, we grew rapidly by acquisition to assemble a world-leading library of children’s and family content. In the second stage, we began to upgrade the necessary team, systems and processes to monetize that portfolio in the global market,” said Michael Donovan, Executive Chair and CEO, DHX Media.
“We are well positioned to enter our next stage of growth, focused on what we identified during the Strategic Review as the two largest opportunities for kids’ and family content: accelerating investment in our WildBrain network to capitalize on the rising popularity of kids’ content on YouTube; and better leveraging our IP portfolio to produce premium originals for major streaming services. We believe this refocusing of our strategy will allow us to deliver significant growth, while generating free cash flow to pay down debt.”
During the Strategic Review, DHX also undertook a comprehensive internal review of its management team, operational processes and structures, and its content strategy. The combined Strategic and internal review process is expected to generate $11 million in annualized operating savings.
Subsidiary Peanuts Worldwide has signed an exclusive agency representation agreement with CAA-GBG for Peanuts in China and Asia (excluding Japan), through to June 2023. This multi-million-dollar agreement is expected to contribute to an approximately 35% increase in revenue for Peanuts Worldwide from this region over its term. The partners will work together to leverage CAA-GBG’s entwork of offices across the region to broaden distribution channels, including at retail stores and online. Peanuts’ presence will also be extended acrosss multiple licensing categories, which already include apparel, stationery, toys, packaged consumer goods and promotional partnerships.
During the Strategic Review, the Special Committee and management determined that the best course for building shareholder value was to better leverage the Company’s IP portfolio to capitalize on key opportunities in the global market for kids’ and family content. A refocused content strategy will prioritize the following objectives:
- Developing New, and Revitalizing Classic, Brands with Content on WildBrain – Invest in more short-form content to deliver rapid returns on investment by leveraging data from WildBrain’s 2.4 billion monthly views and over 50 million subscribers, to create and develop global brands. WildBrain continues to offer outsized growth potential, and we will prioritize investment to drive its growth.
- Developing Premium Kids’ Content to Build Franchise Brands – Prioritize new content development on premium, original long-form series to meet the rising demand from major streaming platforms for exclusive programming. Develop and expand global franchise brands, supported by new premium content, to drive consumer products royalties.
The internal review resulted in the appointment of a new leadership team, as well as changes to operations and structures which have so far contributed toward the Company generating positive cash flow of $37.8 million for Fiscal 2018, excluding one-time acquisition and related refinancing costs of $24.4 million, compared to ($6.5) million in the prior Fiscal year.
Operational Processes:
- Reduced its overall facilities footprint by 35,000 square feet;
- Realigned the DHX Brands team into Franchise and Classic brand management;
- Reduced the development slate and production pipeline to focus on key, high-profile properties; and
- Rebuilt its budgeting process.
Structures:
- Made staff reductions and rationalizations, including licensing of its interactive games business to a third-party, which included assuming all related employee costs;
- Consolidated its Vancouver animation production from two studio facilities into one;
- Consolidated its DHX Brands and Peanuts Worldwide operations in the U.S.; and
- Brought agency representation on Peanuts in-house to CPLG for the U.K, France, the Middle East, Greece and Turkey.
Summary of Outcomes:
- Sold a minority stake in Peanuts to Sony for $235.6 million (US$178.0 million), resulting in: Reduction of debt by $209.0 million; leverage ratio at June 30, 2018 of 6.1x reduced to 4.7x on a pro forma basis 1 after giving effect to the Sony transaction; extended the agency representation agreement for Peanuts in Japan with Sony.
- Signed a multi-million-dollar, 5-year agency agreement with CAA-GBG for Peanuts in China and Asia (excluding Japan).
- Implemented approximately $11 million in annualized operational synergies and cost savings.
- Changed management team to improve execution and culture.
- Change incentive compensation structure to align with improved performance and shareholder value creation.
- Other items: Suspended quarterly dividend, freeing up approximately $10 million annually to invest in rapidly growing WildBrain business and to continue paying down debt; and consolidated two symbols on the Toronto Stock Exchange into a single symbol to enhance liquidity and improve trading volumes.
Fiscal 2018 Report Key Points:
- Revenue grew to $434.4 million vs $298.7 million in Fiscal 2017
- WildBrain revenue grew to $57.3 million vs $34.0 million, driven by a 136% increase in watch time to over 129 billion minutes
- Adjusted EBITDA grew to $97.5 million vs $87.3 million in Fiscal 2017
- Positive operating cash flow of $37.8 million, excluding acquisition and related refinancing payments of $24.4 million, vs $6.5 million outflow in Fiscal 2017
- Net loss of $14.1 million vs net loss of $3.6 million in Fiscal 2017
- Gross margin grew to $190.2 million vs $155.6 million in Fiscal 2017; or a 44% gross margin, from 52%, due to the new mix of business
- Leverage ratio at June 30, 2018 of 6.1x reduced to 4.7x on a pro forma basis 1 after giving effect to the Sony transaction
Fiscal 2019 Priorities & Objectives:
Develop New, and Revitalize Classic Brands with Content on WildBrain
- Continue to drive double-digit revenue growth in WildBrain
- Increase investment in original short-form content
- Launch new series on YouTube for franchise brands
- Pursue potential channel acquisition opportunities
Develop Premium Kids’ Content to Drive Franchise Brands
- Target select high-end originals to meet demand for exclusive programming
- Greenlight production on new series with greater consumer products potential
- Form major agreements for Peanuts to grow brand awareness and licensee base
- Launch consumer products programs on new brands
Improve Cash Flow and Balance Sheet
- Further rationalize overhead expenses and operating efficiencies
- Apply excess cash flow to debt repayment and investment in rapidly growing WildBrain business
- Explore targeted partnerships to best monetize our assets globally
