Comment - Private equity bets on distribution

Dominic Schreiber explains why private equity companies are finally turning their attention - and their money - towards the distribution sector.

Why private equity companies are finally turning their attention to the distribution sector.

With Ingenious Media backing DRG's acquisition of Channel 4 International and Electra Quoted Management's recent investment in Target Entertainment, it seems that private equity (PE) companies are finally turning their attention to the distribution sector.

Major PE firms like Apax, Blackstone and Permira have, of course, been investing in production companies for some time now, fuelling much of the recent consolidation in the indie sector.

But until recently distribution wasn't quite so attractive, since most companies do not own their own IP.

More stable

In many ways, though, the business of selling programmes around the world is a much more stable one to invest in than production - as RDF's shareholders are probably appreciating right now.

And the continuing success of UK programmes around the world has certainly caught the attention of investors.

Despite this, the sector is still dominated by a handful of large players - of the top 30 distribution companies, only three have revenues over £100m a year according to Broadcast's last survey of the sector.

But all that could change over the following years as consolidation and outside investment lead to the creation of more medium sized players and healthier competition.

With a combined turnover forecast to reach £26m by the end of 2008, and plans for further acquisitions, Target will certainly be in a stronger position to compete with the larger broadcaster- distributors as well as the fast-growing super indies.

Make its presence felt

DRG, meanwhile, has already made its presence felt in the past six months, with the acquisitions of Portman, Zeal and ID, and its planned purchase of C4I would certainly see it enter the big league.

Whether other investors will follow the lead of Ingenious and Electra remains to be seen, though.

After all, there are few stand-alone distribution companies around with the kind of turnover that would attract a private equity buyer - which also explains why some distributors are now choosing to invest in production companies instead.

And there are also question marks hanging over these new investors.

The recent turbulence in the financial markets has already threatened to derail a number of major private equity deals, including the auction of Virgin Media, so will the credit crunch impact the production and distribution sectors as well?

Cut throat business

Then, of course, there is the question of just how cut-throat some of these companies can be.

Recent months have seen the private equity sector thrust into the spotlight - with accusations of asset stripping and other unethical practices - and the recent wave of deals in the distribution sector has already raised a few concerns (just ask iD Distribution boss Sally Miles).

In a market where distributors are playing an increasingly important role in the financing of programming, though, access to deep-pocketed backers is only going to become more critical.

And if more private equity billionaires want to start putting their money into the sector, its hard to imagine too many companies will be worried if a few tax breaks were abused along the way.