Trinity Home Entertainment Acquisition (announced May 9) – PAE will buy the California DVD distributor for $10MM, extending PAE’s distribution network into the United States. With earnings of $2.5MM in 2006 on sales of $19MM, we think this acquisition is a great move. We expect Trinity will contribute more than $2.5MM to PAE's bottom line next year, when PAE pushes its newly acquired film libraries through Trinity’s distribution network. PAE continues to buy private companies at attractive valuations, no doubt because there are few competitors in this niche market.
Dufferin Gate Productions Acquisition (announced May 18) – PAE is acquiring Dufferin Gate, who produced the well-received Tudors TV series for Showtime. The company is paying CDN $6MM for Dufferin, which had EBITDA of $1MM last year. We speculate that the price is higher on a relative basis than PAE’s previous acquisitions because the Dufferin acquisition includes a 72,000 production facility located in Toronto. The assets used to produce the Tudors were also likely required, so PAE stands to benefit from the higher margins they will realize when future seasons of the show are produced. In short, we think Dufferin’s future contributions to PAE's bottom line will be significantly above the $1MM EDITDA that was reported.
Private Placement to Raise CDN $33MM (announced May 9) – To raise money for the Trinity and Dufferin acquisitions, PAE is carrying out a private placement. The private placement will dilute ownership by about 35% at current prices (US $2.58). However, we believe this is a much better alternative to debt, which doesn’t fit with PAE’s risk-management strategy. The placement also indicates that institutional investors want to invest in PAE, and we’ll be looking for lock-up provisions to affirm our hypothesis that they will be long-term investors (as was the case with last year’s private placement). View press release.
PAE continues to effectively manage risk while embarking on its ambitious growth initiatives. It is also important to note that a small portion of both transactions are funded by stock ($500,000 for Trinity and $600,000 for Dufferin). This is meaningful because it demonstrates the willingness of the acquired companies’ owners to partake in the growth of PAE – it indicates that they are in for the long haul. The existing management is staying in place also.
We believe that PAE will earn returns that will significantly outpace its cost of capital (last year's acquisition of Canadian DVD distributor Ka-BOOM was hugely successful) which is the principal reason we are sticking with PAE throughout this private placement process. We think management has what it takes to develop a leading North American integrated film company.
Disclosure: Author has a long position in PAE