In a land where content is king, all eyes are on the future of ITV studios

With streaming services acquiring many new customers throughout the pandemic, retaining them is the next mission.

Donald Maxwell-Scott  is a Technical Investment Manager at Rowan Dartington
Donald Maxwell-Scott is a Technical Investment Manager at Rowan Dartington

In the last quarter of 2019 Netflix had 167 million subscribers. However, in the first quarter of 2021 that number had grown to 208 million subscribers, an increase of almost 25 per cent. In order to keep these subscribers; they need to keep creating new content.

Some might be familiar with the phrase "revenue is vanity, profit is sanity, but cash is king". This is true when analysing most companies, but despite Netflix having a market capitalisation of $219bn (at the time of writing) it has only recently decided that it can produce its own content without external borrowing.

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Disney, a relatively recent newcomer to the streaming world, doesn’t expect Disney+ to be profitable until at least 2024.

So, within this sector, perhaps cash isn’t king after all? A more suitable phrase would be: "revenue is vanity, subscriber numbers is sanity, but content is king"

It has recently been announced that Amazon is set to acquire MGM (Metro-Goldwyn-Mayer) for $8.45bn. Most people are familiar with MGM’s roaring lion, which will conjure up nostalgic childhood memories of watching the latest James Bond release, the jewel in the crown of this movie studio.

Of course, along with Bond comes a whole raft of content that will soon be available to stream for Amazon Prime members.

This type of content is important. The difference between a lockdown favourite such as Tiger King and the Disney classic, The Lion King, is that the latter is much more likely to be

watched more than once. Buying older content is also cheaper than making new content. This could present an opportunity in a company very close to home..

Over the last five years, ITV has seen its share value drop from around 220p per share down to 130p per share (at the time of writing) – a decrease of 40 per cent. This is primarily

down to the increase in streaming services such as Netflix, Prime Video (Amazon) and Disney+.

However, ITV has a huge back catalogue of shows such as Cold Feet, Prime Suspect and Mr Selfridge. Midsomer Murders, with an extraordinarily high murder rate, would provide

almost 200 hours of content.

The demand for British television stateside is evidenced with the launch of BritBox, a collaboration between the BBC and ITV, amassing 2.6 million subscribers worldwide.

According to a Bloomberg article in 2020, ITV was named as the top European takeover target for four years in a row. Due to the gap in the production pipeline due to lockdown,

2021 or 2022 may well be the year that such an acquisition is made by a streaming service.

Of course, should an offer be forthcoming it will likely be at a premium to the current share price.

The hidden value is ITV studios, with its impressive back catalogue of shows. I do not believe this is factored into the current share price, with much of the decline attributed to the fall in

advertising revenues.

It is difficult to put a value on ITV studios, but if we consider that Hasbro acquired Entertainment One almost two years ago in a deal worth £3.3bn, about 16X earnings before interest, taxes, depreciation and amortization (EBITDA), and ITV, according to its most recent annual report, shows that ITV studios alone had EBITDA of £152m. Using

16X EBITDA, just ITV Studios should be worth £2.4bn alone.

For the whole ITV group adjusted EBITDA was £573m, which on 16X EBITDA would give it an implied valuation of £9.17bn, yet the current value of ITV is £5.3bn.

In the race for content, we believe ITV does present a compelling takeover opportunity based on the current valuation. Of course, there are no guarantees and ITV could suffer a

further downturn, but it is certainly a company that we will be keeping a close eye on.