December 2019

This is No. 2 in a series of columns by Wade K. Dawe, CEO of  Torrent Capital.

It’s official. DHX Media is now WildBrain Ltd. As Astronaut Snoopy says, “All Systems Are Go.”

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In the span of a year, WildBrain has placed itself mid-stream in a global tidal wave of children’s programming. WildBrain has made YouTube, and Apple TV+, Nickelodeon, and CBS its media partners. The entertainment company just completed a $60 million CAD rights offering.

WildBrain is optimizing its balance sheet by slimming the debt taken on for the purchase of Peanuts (Snoopy, Charlie Brown, Lucy, the whole gang) two years ago.

The children’s programming creator and broadcaster is taking its own Snoopy into space.

As an investor, I see the year ahead as transformational for WildBrain. New CEO Eric Ellenbogen has Marvel in his dossier, and a lot more. Eric some years ago co-founded Classic Media, the manager of Rocky & Bullwinkle, Mr. Peabody & Sherman, Archie and dozens of other branded kids and family entertainment shows. DreamWorks Animation purchased Classic Media in 2012. Previously, Eric ran Marvel Enterprises, the comic book franchise turned film studio, in the days before Disney got its hooks into Marvel.

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I’ve owned DHX Media, now WildBrain Ltd. (Toronto: WILD) for a couple of years in Torrent Capital (Toronto: TORR) and in my personal holdings. As with many start-up companies, forecasts sometimes can be, as one of WildBrain’s titles go, Cloudy With A Chance Of Meatballs, and other times sweet as Strawberry Shortcake.

Allow me to tear a page from our management discussion that we file each quarter for Torrent Capital: “Lofty management guidance pushed DHX stock yards beyond where the price belonged.”

It’s been a bumpy ride for shareholders the past couple of years. From 2010 to 2018, DHX Media grew the asset base and revenues largely by acquisition and in turn burdened their balance sheet with excessive debt. Debt levels increased as “free” cash flow from operations was negligible. Acquisitions were not well integrated or aligned. DHX was asset rich and operations poor.  

In essence, a series of acquisitions, listed here, resulted in an accumulation of debt in conjunction with declining cash flows. While the executive suite was successful in assembling a portfolio of high-quality assets, the confidence of analysts and investors was lost amidst missed guidance metrics — time and time again. Shareholders fled. Analysts turned thumbs down. Debt-to-equity multiples deteriorated; the company suspended its dividend and the stock price plummeted.

Good grief, as Charlie Brown says.

Still, DHX was acquiring rights to iconic kids’ brands, including Teletubbies, Strawberry Shortcake, Bob the Builder, Caillou, Degrassi, Inspector Gadget and the crown jewel, Peanuts.

Also on the honor roll, previous CEO Michael Donovan and his team were early in recognizing the immense opportunity in streaming media services for consumers.  They were early entrants in the industry, developing WildBrain Spark’s programming via YouTube.

Today, Spark is one of the most viewed kids’ networks in the world, utilizing an advertising video-on-demand (AVOD) format via YouTube.The network recorded 12 billion views of its AVOD channels in the 2020 first quarter — a rise of 66% from a year ago.

During the waterfall in share price (September 2018), our Torrent Capital took the opportunity to acquire 2 million shares at an average cost of less than $1.40 CAD. We trimmed a portion of that position six months thereafter when the share price traded more than two times our entry price. Subsequently, we replenished our holdings at lower prices as the DHX, now WildBrain, share price decreased yet again.

WildBrain is fortunate to have the financial backing of New York’s Fine Capital Partners, a fund manager with plenty of patience. WildBrain this autumn offered shareholders an opportunity to partake in a $60 million CAD rights offering that was “backstopped” by Fine Capital.  In turn, Fine in a standby agreement in December 2019 acquired the offering’s unbought shares, boosting its share ownership to 57.4 million shares and its percentage ownership to 33.6 percent from 28percent. See: filing.

The fresh $60 million reduced DHX/WildBrain’s corporate debt, fortified the balance sheet and provided additional cash for newly created programming and content creation.

WildBrain’s working parts are formidable.

Existing library: Wildbrain is one of the world’s largest producers and distributors of children’s shows.The line-up includes Fireman Sam, Teletubbies, Strawberry Shortcake, Polly Pocket, Cloudy With A Chance Of Meatballs, and many others. WildBrain and subsidiaries own the world’s largest independent library of children’s content, some 13,000 half-hours of programs.

Vancouver animation studio: at WildBrain’s studio, some 500 employees are at work creating original content, including new Peanuts shows for Apple. Theart team recently delivered to Apple TV all 12 episodes of the first brand-new original Peanuts series, Snoopy in Space.The first episodes are out and ratings are excellent. The studio attracts and employs world-class animation artists, thus giving WildBrain optionality for its future. “You just never know where the next hit is going to come from,” stated Eric Ellenbogen.

Peanuts (+ Apple): in 2017, DHX Media spent $345 million USD for 80 percent of Charles Schultz’s creation, (Charlie Brown and gang), largely funded through the issuance of new debt. Subsequently, DHX sold 39 percent of its stake to Sony in Japan to pay down debt and today retains a 41 percent interest. During the year, Snoopy in Space began airing on Apple’s new streaming channel to rave reviews. We believe global exposure on the network will be a positive for Peanuts’ consumer products business.

WildBrain Spark: we at Torrent Capital believe Spark will be a major growth engine for the company. As stated, the AVOD network recorded 12 billion views on its channels in the first quarter of fiscal 2020, a rise of 66% from a year ago. Spark revenue for the quarter rose 37 percent from a year ago, to $22.1 million from $16.2 million.

Canadian “linear” channels: remember broadcast television? Worldwide, four times as many people use traditional TV than do their streamer counterparts.Former CEO and co-founder Michael Donovan told me a few times, these “linear” channels, via cable and satellite, bring in a lot of cash. WildBrain’s channels in Canada include Family Channel, and in French-speaking Canada, Télémagino,  reportedly reaching more than 10 million Canadians.

Healthy profit margins are derived from broadcasting “owned” programs  to the channels’ audiences. These traditional linear channels generate positive cash flow, although given the changing dynamics in the marketplace, cash flows should be expected to decline gradually over time. However, we expect revenue growth rates from Wildbrain Spark to significantly outpace the gradual decline of linear channels.

Early signs of improving financials: WildBrain’s most recent quarter demonstrated respectable revenue growth, margin improvement and operating cash flow of$18.7 million. Total revenue increased 8% to $112.3 million CAD in the quarter vs. $104 million in Q1 2019. An additional $7 million of debt was repaid. Management is committed to trimming legacy costs while boosting productivity.

WildBrain shares trade in Toronto at a one-year forward EV/EBITDA multiple that is less than half its peer group average of 21.5X.

I believe the market’s discount will decrease through 2020 as management better integrates the working parts of the company using  a “life-cycle” approach across all of its streams, channels, studios, licensees, merchandisers and the library.

Original and reworked library programming is created in Vancouver. Much of it is streamed on Spark. The new and rebranded cartoons and other programming appear on Canadian linear channels, while toys and apparel are created and sold as families latch onto the characters.

With the Spark platform, WildBrain can test-market IP in real-time. That was never possible previously with linear television.

Executives will identify content that’s rapidly gaining views and focus efforts and creative teams in those areas.

The WildBrain balance sheet is improving quarterly, and the Wildbrain team are working overtime to re-integrate all divisions of the company. Relative to its peers, WildBrain is undervalued, and today more than ever, content is king.

Eric and his team have the ability, track record and experience to boost cash flows by a double-digit percentage.

This is Canada’s Disney, and I’m tuned in.

Wade Dawe

December 2019

Halifax, Nova Scotia

 

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