Cable sparks a US indie M&A frenzy

The international media groups that previously drove rounds of M&A activity among indies in the UK and Europe are now focused on acquisitions in the US as the cable sector and unscripted business boom. John Hazelton looks at who’s buying what, where opportunity lies and asks who’ll be next on to board the consolidation gravy train.

Duck Dynasty, Here Comes Honey Boo Boo (pictured), Pawn Stars and other US cable hits haven’t just been a boon to the networks that screen them and the colourful real-life characters the shows have turned into unlikely pop culture celebrities.

Unscripted cable series, with their deficit-free financing models and high episode counts, have also become the lifeblood of hundreds of independent US production companies. By pumping out episodes of shows made on higher budgets than those usually seen in the international markets, US indies can pull in production fees totaling millions of dollars annually. To illustrate the point, late last year Duck Dynasty creator Gurney Productions forecast that its annual earnings before tax and interest would be “at least US$10 million.”

Not surprisingly, the reality business model has attracted interest from some of the international media groups that previously drove rounds of M&A activity among indies in the UK and Europe. As a result, over the past decade more than a dozen leading US independents have been acquired by European powerhouses including ITV, Red Arrow, Endemol and FremantleMedia.
In the most recent round of deal making, Germany’s Red Arrow added to a portfolio that already included two-year-old Kinetic Content – the producer of NBC’s Betty White’s Off Their Rockers – and scripted producer Fabrik Entertainment by taking a majority stake in New York-based Left/Right, producer of VH1 series Mob Wives.

The UK’s ITV went on a spree that saw it paying US$40 million for 61.5% of Gurney Productions, US$25.7 million for 60% of High Noon Entertainment – best known for Cake Boss – and $30 million for 65% of Hatfields & McCoys’ producer Thinkfactory Media. ITV has said it expects the US operations to add £70 million (US$100 million) to its revenues this year. ITV Studios boss Kevin Lygo talks extensively about his division’s US ambitions elsewhere in this issue and the message is emphatic: ITV will be investing heavily in US content production. Other European players highlight what they see as the benefits of buying into the US indie production sector.

Leftfield’s American Restoration

Cash flow is certainly one kind of pay-off, as is the scale of a production giant.

“What you’re getting, or expect to get, is a certain level of industrial scale,” says Jan Frouman, group managing director of Red Arrow. “The US production market is so large that the ability for producers to build a highly profitable business on the back of simply production volume is far greater than it is in other territories. So as a production group that’s looking to build a level of financial scale, the US is really a must-have.”

Producer expertise and a route into the US market are also valuable says Jonathan Slow, CEO of Zodiak Americas, the division of DeAgostini-owned Zodiak Media that three years ago absorbed the operations of RDF USA: “Zodiak producers around the world aspire to create a hit US show and being able to offer them the best chances of selling their ideas in the US is a big talent draw and of crucial importance to us as a group.”

The IP benefits of buying US companies are less clear. The US cable industry’s current preference for character-driven docusoaps rather than format-based contest shows means that cable-focused US indies don’t necessarily generate a big flow of exportable formats.  And where international rights to finished shows are concerned, US indies, which do not operate under the sort of standard trade terms that, for example, protect their UK counterparts, have never found it easy to retain them. This is especially true since US cable networks began expanding their own international operations.

European players, however, suggest that their financial strength and distribution experience will make it easier for their US companies to retain international rights.

David Goldberg, the outgoing chairman of Endemol North America, whose US holdings include majority stakes in True Entertainment, Original Media, 51 Minds and Authentic Entertainment, says: “If we contribute to the production upfront to offset costs the cable channels are not only willing to let us distribute internationally, they’re also willing to let us participate in the back end.”

And Stephen Lambert, chairman of All3Media America, whose US operations include Zoo Productions and Lion Television, says his company secures international rights to “the lion’s share” of its US projects. That’s possible, he adds, because of it “relationships and experience of working with the buyers, but also the fact that we are an international company and they know that we’re very good at handling ‘international’”.

US independents that have agreed to be acquired by the European players have their own takes on what the arrangements provide. The financial security provided by a wealthy parent is undoubtedly a plus.

Top Shot from Pilgrim Studios

“It comes down to managing risk,” says Tom Rogen, co-founder and executive producer at Here Comes Honey Boo Boo prodco Authentic Entertainment, which agreed its initial 51% sale to Endemol – with the remainder to be sold over five years – for a reported US$60 million in 2010. “When you look at the amount you’re being offered and the security that that gives – at least in the US market where there’s no ancillary revenue stream – it becomes an offer you can’t refuse.”

For independents that can retain some international rights to their series the distribution benefits can also be significant. Thom Beers, now CEO of FremantleMedia North America, says that after 75% of his Original Productions sold to Fremantle for a reported US$50 million four years ago, the British group’s international sales push on Original shows such as Are You Tougher Than a Boy Scout? and Storage Wars “basically tripled my revenue from distribution”.

Still, even when there are theoretical benefits to having a corporate parent, the practicalities can take some working out. Rogen concedes that plans for Authentic to work with Endemol on specific projects have been slow to come together since the pair joined forces.

“The hope was that they would be able to coproduce more shows with us,” he explains. “Endemol would provide a percentage of the budget and in exchange the network would give us worldwide rights, or ownership of the copyright.” In practice, he says, “they’ve coproduced one limited series for us and we’ve talked about other things, but nothing has actually come to fruition unfortunately.”

Meanwhile, the US indies that are still truly independent argue, not surprisingly, that they can still compete with their foreign-owned rival prodcos. “It doesn’t matter that some big conglomerate owns you,” insists Eric Evangelista, founding partner and executive producer of three-year-old New York independent Hot Snakes Media, best known for docusoap hits Breaking Amish and Amish Mafia. “It comes down to how many people are watching your show. You survive based on your ideas.”

And longstanding indies can sometimes match the clout of corporate-owned companies.

“We’ve been around for a while, so early on we were able to keep a lot of our IP,” says Craig Piligian, president and CEO of Top Shot and American Chopper producer Pilgrim Studios. “Lately it’s been a little harder but the networks do recognise our value so we do get a nice back-end position.”

Betty White’s Off Their Rockers

One independent has even become a buyer itself. After resisting acquisition interest from bigger companies, New York indie Leftfield Pictures, producer of Pawn Stars (in both its US and UK versions) and American Restoration, earlier this year bought Real Housewives of New Jersey producer Sirens Media.

The plan, says Leftfield owner and executive produce Brent Montgomery, is to build “an American super-indie” that will encompass US producers making shows that compliment Leftfield’s own and companies from territories including the UK, Australia ans Canada that work in the same genres as Leftfield.

Leftfield’s ambition signals that the latest wave of consolidation among US independents is far from over. Future acquisition targets could include established indies Magical Elves (Top Chef) and Evolution Media (Real Housewives of Beverly Hills) as well as start-ups like Hot Snakes and Giant Pirates, the new venture headed by former executives from Magical Elves and Tijuana Entertainment.

Buyers could include companies – among them France’s Banijay Entertainment, Dutch group Eyeworks and American brand builder Core Media Group – that have so far made only one-off acquisitions in the US production sector as well as some of the groups such as the still acquisitive ITV that already own portfolios of US indies.

All3 Media America, for one, is “certainly looking at some start-ups,” confirms chairman Lambert. And FremantleMedia, says Beers, is “actively in pursuit of several companies”. The aim, Beers explains, would be to add family and lifestyle programming to the male-oriented series made by Original Productions and the high profile US network shows made by FremantleMedia itself.

New models open up scripted possibilities

Until now, independent US production companies have had most success, and attracted most attention from potential
corporate buyers, by feeding the cable sector’s appetite for low cost but potentially high profile unscripted programming.

The production of scripted programming has been viewed by many indies as a very different business, involving more risk and less reliable revenue for writer-producers who are working under overall deals requiring them to cede all rights to networks or studios.  But with new outlets for scripted series keen to spread risk, and the market for unscripted programming arguably reaching saturation point, some indies and their corporate parents are now taking a closer look at the scripted business.

Says All3Media America president Eli Holzman: “We’re seeing a tremendous amount of change to the traditional scripted model as more and more players enter the marketplace, whether they be Hulu, Netflix or Amazon or FXX. As a result, there’s a lot of opportunity, particularly for a company like All3 with a robust distribution business at its heart.”

Indies from the unscripted world might bring new creative ideas to the scripted business, Holzman suggests: “Somewhere between Duck Dynasty, the Kardashians, Curb Your Enthusiasm and The Office is a different creative model that might involve a lot of improvisation, filmed much like a documentary and yet edited or structured more like a scripted project. And in that
creative model, where there’s a less intense cost structure, there’s also opportunity.”

Indies already exploring new financial and creative models include ITV’s Thinkfactory, which put some of its reality experience to use in History Channel miniseries Hatfields & McCoys (pictured); Pilgrim Studios, whose dramatised special Megalodon: The Monster Shark Lives was recently a controversial hit for Discovery; and Giant Pirates, which last month signed on to provide scripted projects to a joint venture with Trigger Street Productions, producer of Netflix’s US version of House of Cards.

Next to experiment could be Red Arrow’s scripted company Fabrik, which has an overall deal with Fox Television Studios but is making procedural Bosch for Amazon Studios, with Red Arrow International expected to handle global sales if the pilot is ordered to series.

Potential American super indie Leftfield Pictures is also considering the scripted area, though with a certain amount of caution.
“A wise person once told me that you do the scripted show and you get the nice table at the fancy restaurant,” jokes Leftfield head Brent Montgomery. “You do the unscripted show and you buy the restaurant.”

Still, Montgomery continues: “We are talking to experts in the field and we would look to do an acquisition of a company that makes some scripted television. We see a real sweet spot in low-budget scripted.”