Editor’s note: On Sept. 7, 2012, Entertainment One Ltd. announced it had entered into an agreement to acquire Alliance Films. This story was published in Canadian Business magazine Aug. 8, 2012. Read the update here.
ACT I: RUMOURS, LUCK AND BALLS
The whispers began in January, as soon as Goldman Sachs and provincial fund Investissement Quebec announced they were putting Alliance Films on the block. Canada’s dominant movie distributor had had a couple of solid years and, with the film business finally turning around after the post-2008 slump, the investors saw a window to cash out. Entertainment One Group, the Toronto-based upstart that had rapidly grown into Alliance’s only real competitor, was immediately mentioned as the likely buyer. The buzz grew louder when the two companies seemed to avoid bidding against each other for distribution rights at the Cannes festival.
Since eOne confirmed negotiations in late May, the industry has been taking the merger as a given. The combined entity would control practically all the films that are not made by the big six Hollywood studios. While the studios command 80% of Canada’s roughly billion-dollar theatrical market, the remaining 20% includes all Canadian films, plus some of the most successful recent independent releases, from The Hunger Games to The King’s Speech.
The mission for companies like eOne and Alliance is to squeeze every cent of revenue out of each title they handle, starting at the box office and ending at a Walmart DVD clearance bin. That requires pull with exhibitors and broadcasters, a smart marketing strategy and the savvy to know which films will repay those promotion dollars.
It’s the back story, however, that’s made this potential union such tasty gossip fodder. Alliance, the granddaddy of the industry, would be taken out by a company that just five years ago was a struggling wholesaler of CDs, DVDs and videogames watching its business quickly become obsolete. Today, eOne is the largest international distributor of television and independent films in the world, with $809 million in sales and offices in seven countries. This feat was engineered by two guys who until 2006 had never met: CEO Darren Throop, an Albertan with no formal business education, whom his partner calls “the ultimate entrepreneur”; and Patrice Theroux, founding president of eOne’s Filmed Entertainment division, which today comprises 90% of the company’s business. “It’s phenomenal,” says Hussain Amarshi, head of Montreal-based distributor Mongrel Media, of what the pair has built. “It was a combination of luck and balls, and they had both.”
The luck was an early gamble on the production company behind the Twilight vampire saga, which has grossed more than US$2.5 billion worldwide and established eOne on the scene. As for the balls, that’s where the story takes on the sheen of a Hollywood potboiler: a talented protege oversteps his bounds and is thrown out of the company he helped build alongside a man he considered a father figure. The exiled son then creates a successful rival on an even grander scale, modelled on his former employer. That protege is Theroux; the company that dumped him is Alliance. “EOne was in a position to occupy an entirely vacant space in the Canadian industry, that of a multifaceted entertainment company,” says Robert Lantos, a co-founder of Alliance who now sits on eOne’s board. “For many years, it was occupied by Alliance, but what remains of Alliance is a sliver. EOne today is quite similar to the previous Alliance model.”
Seated at a midtown Toronto Starbucks around the corner from his office in late June, Theroux can’t hide his delight at the recent turn of events. “I’m surprised how far we’ve come in five years,” he says, his face lit up with genuine wonder, then quickly corrects himself: “Well, no, not entirely surprised.” Still, the principals had expected the deal to be done by June. As of early August, negotiations were still “ongoing,” raising doubts whether they will succeed. If they do, eOne would be assured product for its growing distribution pipeline and become the national industry’s undisputed leader. Best of all, the plot would get a satisfying ending—and become the ultimate revenge story.
ACT II: EXILE OF THE PROTEGE
Like many juicy corporate dramas, the tale of Entertainment One opens with a boardroom fight. After 18 years at Alliance, eight of them as president of the movie distribution unit, Theroux was booted out in 2006 for trying to orchestrate a management buyout. At the time, he insisted Alliance had stated during an analyst call that the business was for sale and he, as president, had executive privilege to seek a deal. Alliance’s board disagreed. This led chairman Victor Loewy, Theroux’s mentor, to storm out in protest. The company, in turn, locked him out of his office. Alliance eventually lured Loewy back after he threatened to start a rival firm.
For Alliance, this was but another chapter in a tempestuous history. Founded by Loewy and Lantos in 1985, the company merged with Atlantis Communications in 1998 and became the Canadian equivalent of a vertically integrated Hollywood studio. It produced films (The Sweet Hereafter, Bowling for Columbine) and TV shows (CSI: Crime Scene Investigation, Traders) and owned the infrastructure for getting them to market: the distribution unit along with more than a dozen specialty TV channels. In 2003, however, the company shuttered its money-losing production arm. Then, in 2007, Goldman Sachs and Canwest Global split the business between them in a $2.3-billion deal that left the distributor—renamed Alliance Films—as the last remnant of what had been a Canadian entertainment empire.
Theroux concluded the whole thing was simply “the catalyst for ending a relationship that had run its course.” A scion of a Quebec book-publishing family, he’d spent most of his career at Alliance. He started out running the Quebec arm of its home-video division but quickly became Loewy’s top lieutenant. Loewy, who’s been called “the godfather of the industry,” was the flamboyant mogul on a first-name basis with Hollywood bosses and with a knack for intuiting a movie’s market potential. Theroux, a more cerebral strategist, worked up the deals and tended to the operational details.
But with Alliance showing little ambition for growth, Theroux began to grow restless. Some months before his dismissal, Theroux had met Darren Throop, the CEO of ROW Entertainment Income Fund. Throop had joined ROW (born out of the Records on Wheels chain) in the early 1990s and built it into Canada’s biggest wholesaler of retail music and movie products. But the inexorable shift to digital distribution didn’t bode well for a stocker of store racks. “Things were dicey,” recalls Amarshi, who did business with ROW. “We were scared what would happen to them.” Throop knew his core operation faced a steady decline. “We had to control our destiny,” he said at the time, “and the only way to do that was to own content or have long-term rights to it.”
The pair decided that, with Theroux’s connections, there was an opportunity to create an international distributor that offered independent movie producers one-stop access to multiple regional markets. While the Hollywood studios make, promote and distribute their own content worldwide, non-studio releases are an entirely separate ecosystem that lacks such infrastructure. That means indie production firms must negotiate numerous deals in different markets. Throop and Theroux wanted to give them an alternative to the studio system.
They moved fast. ROW went public on London’s AIM exchange, rebranded as Entertainment One Group. Four months later, Theroux moved into his new office—right across the street from his former base at Alliance.
Theroux knew that for producers to trust eOne with their titles, it needed size—fast. A distributor’s lifeline are so-called output deals, which give it regional rights to all of a production company’s releases over several years. Alliance’s partnerships with New Line (owner of the Lord of the Rings franchise), Miramax Films and other Hollywood hit factories drove its dominance in the market. For eOne to get such deals, it’d have to persuade producers it not only could get their movies into theatres, but would milk every dollar, pound and euro from what follows: sales to broadcasters, airlines, hotels and online streaming services, which can comprise three-quarters of a movie’s total take.
For that, Theroux’s track record and Hollywood connections were key. His job isn’t glamorous, he insists. Sure, he attends film festivals, but he’s usually in meetings far away from red carpets, and calls them “gruesome” in terms of workload. Fundamentally, he’s a deal maker, one of the best in the business—perhaps second only to his former boss, Loewy. And he gets things done fast. To wit: less than two months after Theroux joined eOne, the company announced a multi-territory deal with Summit Entertainment, an up-and-coming Hollywood player getting ready to release a movie based on a vampire book series. Summit liked eOne’s international pitch. “[As a producer] you get more consistency in the marketing, and you don’t have to have the same conversation with a dozen different players,” said Summit CEO Rob Friedman at the time. It proved a key win for eOne, though Theroux admits he didn’t know the Twilight saga would be the phenomenon it became. “It’d make me look a lot smarter,” he chuckles.
EOne used the $200 million it had raised from existing investors and the proceeds of its IPO to go on a shopping spree. Within seven months, it acquired three distributors: U.K.-based Contender Entertainment; RCV, which serves the Benelux countries; and Seville Entertainment in Montreal. Seville co-founder David Reckziegel, now the North American head of eOne Films, liked Throop’s style. “He’s a straight shooter, the kind of businessman with whom there’s no major subtext,” he said after the deal. It was Theroux’s involvement, though, that persuaded him eOne could pull off its plan. “This is very much a relationship business, and with Patrice no longer at Alliance, some of those relationships would be…available.”
Over the next five years, the strategy stayed consistent: buy a region’s strongest available player and expand its market reach. As Theroux explains, eOne delivers a “toolbox” to the companies it buys, which they can use to grow. Under eOne’s ownership, for example, Seville has grown from a distributor grossing $10 million into a $170-million operation.
EOne’s portfolio approach, based around output deals, spreads risk over numerous titles. But the company had to ensure a steady supply of content for its distribution operation, and a stable stream of revenue. The answer to both: television.
In mid-2008, eOne made a blockbuster four-part deal largely engineered by Lantos: it bought three TV companies, two in Canada and one in the U.S., plus Lantos’s boutique film distributor Maximum Films. The transaction instantly made eOne the Canadian leader in TV production, with a library of 9,300 hours of programming.
Television was a good fit for several reasons. First, the proliferation of new broadcasters and digital services worldwide has boosted demand. It’s a US$400-billion global business today, nearly four times the size of the movie industry. Secondly, TV is more industrial than film; multiple seasons of a show create a predictable flow of cash. “With film, you wait for the all the stars to align—the right script, the right moment, director, cast, financing scenario—and one piece of the cast falls off, you start over again,” says Theroux. What’s more, about 85% of a TV producer’s costs are covered up front, as shows are typically presold to a North American broadcaster. Any sales overseas are gravy. Once a show has aired, it becomes part of a library that can be recycled and reissued in different formats in perpetuity. That’s where the real money lies, says Lantos. “A library becomes an annuity and tends to go up in value at no further cost.”
TV producers in this country have a particular advantage because of tax credits, subsidies and built-in demand for Canadian content, which is why eOne has focused on production here that it then sells abroad. The unit is thriving. In the latest quarter, eOne’s TV revenues tripled year over year on the back of hits like The Walking Dead on AMC and Rookie Blue on ABC and Global.
One of the TV group’s prize titles is a kids show called Peppa Pig, which eOne acquired along with U.K.’s Contender Entertainment in 2007. “It was just a baby pig then,” jokes Throop, “but it really took off,” becoming a British sensation. It gave eOne entry into family television, a unique niche of the business with outsized margins. Theroux and Throop acknowledge that kids’ shows are little more than commercials for licensed merchandise, a US$43-billion global industry. The broadcast rights bring in negligible revenue; it’s in the toys, books and games where the real money lies. But it’s a hard market to crack in North America because broadcasters have bought up the producers of top properties, limiting airwave access for independents. So when, in late 2010, eOne inked a three-year deal with Nickelodeon for Peppa, Throop called it “transformational.”
TV’s stability is important too because the economy can wreak havoc with the film business. In the years prior to 2008, Hollywood saw production explode, fed by billions of dollars flowing in from flush Wall Street funds. When the money dried up, several major independent producers closed up shop.
The financial crash also put a stop to eOne’s acquisition spree. That summer, the company was planning to repatriate its London listing to the TSX through a reverse takeover of DHX Media, a Halifax children’s TV producer. When the crisis hit, the deal died. The subsequent hiatus proved fortuitous, however, allowing eOne to digest the eight acquisitions it had made in the previous year. “It made us pause and contemplate what we had and get our cost base in line and our culture in order,” says Throop. EOne didn’t do another deal until the April 2011 purchase of Australian distributor Hopscotch Films.
ACT III: THE ULTIMATE REVENGE?
In the past two years, the movie business has reawakened, with financing coming back into the market. The success of such non-studio films as The Hunger Games and the Twilight series has increased global interest in independent releases. But it’s not back to pre-2008 bonanza levels yet. Ben Mogil, an industry analyst at brokerage Steifel, Nicolaus & Co., says there’s less out there for independents. “The studios are doing fewer films and bigger global tent-pole films. Neither Alliance nor eOne have those Canadian rights, so they need more product to keep the pipelines full.”
Meanwhile, the gutting of the rental sector has hit the independent side hard. “When Blockbuster was thriving in Canada, their sweet spot was mid-performing films,” says Amarshi—the movies that people heard about but waited to see on DVD. So far, digital distribution through Netflix and iTunes isn’t making up that gap.
All these reasons are driving a consolidation. In fact, late last year, eOne shopped itself around after an undisclosed British player made a bid. No satisfactory offer emerged, and the sudden availability of Alliance created a rare opportunity. The combined business would not only control the Canadian market, but could rationalize competing operations in the U.K. Alliance’s library of 11,000 movie titles would also boost eOne’s offerings to broadcasters and other partners. While eOne has grabbed about a third of Alliance’s Canadian market share, the latter continues to hold most of the key supply deals. Most important, Alliance’s purchase of Toronto-based distributor Maple Pictures last year gave it access to all of Lionsgate’s movies, including The Hunger Games franchise. Meanwhile, the continuing ownership shakeout saw Lionsgate acquire Twilight maker Summit in January, which means eOne’s deal with Summit likely won’t be renewed past 2015.
The prospect of eOne and Alliance merging elicits mixed feelings in Canada. “That kind of consolidation is never good for any industry,” says Amarshi. Canadian filmmakers need distribution deals up front in order to secure financing, and veteran producer Niv Fichman, who runs Rhombus Media, says it’s unclear how committed eOne is to Canadian film. “At Alliance, it comes right from Victor Loewy, who has issued instruction that he wants to release Canadian films.”
But consolidation and monopoly are nothing new to Canada’s entertainment industry. Jeff Sackman, former president of Lionsgate and distributor ThinkFilm, points out that back in the late 1980s, Cineplex Odeon controlled 90% of independent distribution. Later, Alliance came along and became the industry goliath. “Now everyone is freaking out as if this would be the first time,” he says. “But when there is a dominant player, it creates opportunities for new guys to come in.”
EOne isn’t betting its future on Alliance. It doubled its profit last year, thanks to another Twilight release and a strong TV roster. There are big plans for Peppa Pig, with a U.S. merchandising rollout and a push into Asia, as well as more co-productions in Australia and the U.K.
Back at the coffee shop, Theroux deflects questions about the merger by pointing to the bigger picture. “Think about it: two of the three biggest independent distributors in the world are Canadian”—eOne and Alliance, along with France’s Canal Plus. Buying Alliance might give him vindication, but most of the people responsible for his ouster have moved on. Success may have to be revenge enough.