DHX Media Ltd. (or the “Company”) (TSX: DHX.A, DHX.B, NASDAQ: DHXM), has signed a definitive agreement to acquire the entertainment division of Iconix Brand Group Inc. (“Iconix”), which includes both an 80% controlling interest in Peanuts and 100% of Strawberry Shortcake. The remaining 20% interest in Peanuts will continue to be held by members of the family of Charles M. Schulz. The total purchase price for this acquisition is US$345 million, subject to a customary working capital adjustment, to be paid through a combination of cash on hand, new debt financing facility and a private placement offering of subscription receipts ultimately exchangeable for convertible debentures. The transaction is expected to close on or around June 30, 2017.
“Peanuts is one of the world’s greatest entertainment brands, with a tremendous global legacy of comics, animated content and consumer products reaching back almost 70 years,” said Dana Landry, CEO of DHX Media. “We are thrilled by the opportunity to welcome Charlie Brown, Snoopy, Lucy, Linus and the entire Peanuts gang into our family of leading kids’ properties, including Teletubbies, Inspector Gadget, Caillou, Degrassi and others.
Jean Schulz, widow of Charles M. Schulz, commented: “DHX Media feels like a perfect fit for Peanuts. We respect their innovative and rich history with developing children’s shows and brands, and we look forward to working with Dana and his team to steward Peanuts in the future.”
“Over the past ten years, DHX Media has become a global leader in children’s entertainment content, building scale across production, distribution and consumer products and is perfectly positioned to benefit from the incredible growth of streaming services, worldwide,” Mr. Landry continued. “Peanuts and Strawberry Shortcake have widespread, evergreen appeal that make them ideal for layering onto this platform, complementing our 450-title library, and significantly increasing our scale in consumer products. These brands are expected to drive meaningful growth across multiple revenue streams, and we look forward to extending their reach to new generations of kids worldwide.”
Craig Schulz, son of Charles M. Schulz, added: “The Schulz family is thrilled to be partnering with DHX Media, as we have been greatly impressed by their professionalism and expertise. My father’s comic strip and his entire body of work has delighted generations of fans for over 66 years, and we feel confident that DHX Media are the right people to help propel Peanuts into the future.”
Strategic Benefits & Value Creation for DHX Media
- Adds 340+ half-hours of proprietary content to DHX Media’s library, which can feed potential new production including new digital content for YouTube, mobile, and video-on-demand services.
- Creates opportunities to mine an underexploited library for global distribution and expansion into new territories and channels, including our WildBrain network on YouTube.
- Combines two highly complementary family entertainment brands to expand our global portfolio while increasing the scale and breadth of our consumer products business from 19% to 44% of total annual revenue, on a pro forma basis.
- On a pro forma basis, DHX Media revenue would grow 52% to approximately C$443 million, and adjusted EBITDA would rise by 40% to approximately C$134 million(1)(3). The transaction would be 6-10% accretive to earnings per share and 25-30% accretive to free cash flow per share(2), on a pro forma basis. Even on a leverage neutral basis, the acquisition would be accretive. The highly cash generative nature of the combined entity provides the ability to rapidly de-lever while still permitting investment in the company.
- DHX Media also expects to realize annual cost synergies of C$5 million within the first year post-closing (which relates to 13% of the target trailing 12-month EBITDA), and C$25 million within the first five years.
Financing at close includes a US$30 million revolver, a US$510 million committed term facility (4.1x to 4.4x(4) leverage) and C$100 million senior unsecured convertible debentures (0.6x to 0.7x(4) leverage). The company is targeting to reduce leverage to 3.0x(4) by the end of Fiscal 2019. DHX Media has entered into a commitment agreement with RBC Capital Markets and Jefferies Finance, LLC to provide a fully underwritten debt financing covering the purchase price and also refinancing substantially all of the company’s current indebtedness.
Concurrent with such bank financing, DHX Media has entered into an agreement with a syndicate of underwriters (collectively, the “Underwriters”) to purchase, on a bought deal private placement basis, 100,000 subscription receipts of the Company (the “Subscription Receipts”), at a price of C$1,000 per Subscription Receipt, for aggregate gross proceeds of C$100 million (the “Offering”). The proceeds of the Subscription Receipts will be held in escrow and released to the company upon the completion of the acquisition. If the acquisition is not concluded within 120 days of issuance of the Subscription Receipts, then the Subscription Receipts will be cancelled and the funds held in escrow returned to the investors.
The Company has granted the Underwriters an option exercisable up to the day prior to closing of the Offering to purchase an additional 15,000 Subscription Receipts (the “Option Receipts”) on the same terms and subject to the same conditions as the Subscription Receipts. If the Underwriters exercise their option to purchase the Option Receipts, aggregate gross proceeds of the Offering will be C$115 million.
Each Subscription Receipt will entitle the holder thereof to receive, upon satisfaction or waiver of all conditions precedent to closing of the acquisition pursuant to the definitive agreement (other than the final condition precedent of payment of the purchase price to the vendor), for no additional consideration and subject to adjustment, one special warrant (the “Special Warrants”) that, upon the satisfaction of certain conditions, shall be automatically exercised, for no additional consideration, to acquire one 5.875% senior unsecured convertible debenture of the company (each, a “Convertible Debenture” and, collectively, the “Convertible Debentures”). Each Convertible Debenture shall be convertible into common shares of the company at a price of C$8.00 per common share, subject to adjustment in certain events.
The Offering is scheduled to close on or around May 31, 2017, and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approvals of the Toronto Stock Exchange and the NASDAQ stock market. Upon request of the Underwriters, the company will use its reasonable commercial efforts to file a prospectus supplement or a prospectus in order to qualify the distribution of the Convertible Debentures issuable upon exercise of the Special Warrants in Canada. If so requested, the prospectus supplement or prospectus will be filed following the filing of a business acquisition report by the company in connection with the acquisition. The Special Warrants will automatically convert into Convertible Debentures upon the earlier of (i) the third business day following the filing of the prospectus supplement or the issuance of a receipt for the prospectus, and (ii) the date that is four months and one day from the date of the closing of private placement.
The securities to be issued under this Offering will be offered by way of private placement exemptions in all the provinces of Canada and elsewhere. All securities issued pursuant to this Offering will be subject to a statutory hold period of no more than four months from the date of distribution of the Subscription Receipts in accordance with Canadian securities legislation, subject to the prospectus qualification referred to above. The securities being offered have not been registered under the U.S. Securities Act of 1933, as amended, or applicable state securities laws, and may not be offered or sold within the United States absent registration or an applicable exemption from such registration requirements. This news release does not constitute an offer to sell or the solicitation of an offer to buy any securities nor shall there be any sale of any securities in any jurisdiction in which such offer, solicitation or sale would be unlawful.
Redemption of 5.875% Senior Unsecured Notes due December 2, 2021
As part of the refinancing related to the acquisition, DHX Media will redeem its 5.875% Senior Unsecured Notes due December 2, 2021 (the “Notes”) on the terms as set out in the indenture governing the Notes. As of the date hereof, C$225 million aggregate principal amount of the Notes remains outstanding.
The redemption of the Notes will be conditional on the closing of the acquisition and completion of the financings detailed herein.
(1) USD / CAD = 1.3285
(2) DHX Media free cash flow defined as cash flow from operating activities less capital and intangible asset expenditures, plus or minus changes in interim production financing.
(3) Based on the last 12 months to Dec. 31, 2016, and excluding synergies.
(4) Closing assumed to be June 30, 2017. Fiscal 2018 calculated using pro forma June 30, 2017, adjusted EBITDA expected to be US$105 million, and assumes a range of growth and first year synergies of US$10 to $20 million.