DHX Media Picks Up Nerd Corps Entertainment

Canada's DHX Media Ltd. is inheriting popular children's comedy adventure series Slugterra, announcing a deal to buy Nerd Corps Entertainment Inc. for up to C$57 million ($50 million).

The Halifax, Nova Scotia-based television production company said Tuesday it would shell out a cash payment of as high as C$32.7 million and the rest via the issuance of 2,963,748 DHX shares. The C$57 million price tag is inclusive of excess cash in Nerd Corps upon the deals' completion. The deal is expected to close by Dec. 24.

Nerd Corps, created in 2002 by Asaph Fipke and Chuck Johnson in Vancouver, considers itself amongst the largest children's animation studios in North America. The company's biggest licensing property is SlugTerra, which broadcasts on Disney XD in Canada and the U.S. Its other titles include Endangered Species, Monster High, Max Steel and Kate & Mim-Mim.

Nerd Corps posted unaudited revenue of about C$20 million and adjusted Ebitda of about C$10.6 million during fiscal 2013. Should the target receive the full C$57 million consideration, the deal implies an enterprise value-to-revenue multiple of about 2.9 times and EV-to-adjusted Ebita multiple of about 5.4 times.

"While we recognize that nearly half of Nerd Corps' business is 3rd party studio work, we still consider this multiple attractive," RBC Capital Markets analyst Haran Posner wrote in a Tuesday note.

DHX said it expects the acquisition to be earnings accretive in fiscal 2015. Posner anticipates between 50 cents and $1 accretion to net asset value per share.

While Nerd Corps isn't significant from a cost synergy perspective, the acquisition will buoy DHX Media's operating leverage through the target's studio capacity in Vancouver, Posner wrote. The analyst also noted that the deal offers opportunities for revenue synergies via DHX Media's existing international distribution network, gives the buyer a greater footprint in the "toyetic" boys action segment comprised of ages 6-14, and improves its application and gaming offerings.

The Nerd Corps purchase helps backfill DHX Media's still pricey share value, but additional deals may be needed, added National Bank Financial Inc. analyst Adam Shine in a Tuesday research note.

DHX Media trades at an EV-to-Ebitda multiple to 14.3 times is pro forma 2015 estimate, as compared with the about 13.5 times the trading multiple of its peers — Entertainment One Ltd. (ETO) , Lions Gate Entertainment Corp. (LGF) and DreamWorks Animation SKG Inc. (DWA) , the analyst said. Taking into account the volatility in Dreamworks' results relating to its film production, the latter is closer to a 12 times multiple, Shine added.

Nerd Corps' Fipke will join the DHX Content team, where he will serve as chief content officer, Kids & Family, while Nerd Corps president Ken Faier will join DHX Content as senior VP and general manager, Kids & Family.

DHX's last purchase was on April 3, when it bought the producer of teen-drama series Degrassi, Epitome Pictures, for approximately C$44 million including cash.

A much larger scale deal came about four months earlier, when it bought a group of children's channels from BCE Inc. subsidiary Bell Media, including its popular Family Channel, for C$170 million ($160 million) in cash.

Shares of DHX Media, trading on the Toronto Stock Exchange as DHX.B, were up about 4.9%, at C$9.36, in afternoon trading.

Officials with DHX and Nerd declined to comment.

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