DHX sells Peanuts stake to Sony for $237M to cut debt, boost business in Asia

DHX Media Ltd. is optimistic Charlie Brown will help save the day at the children’s content company at it grapples with a traditional television market disrupted by the internet.

The Halifax-based company confirmed Monday that it signed a $237-million deal with Sony Music Entertainment (Japan) Inc. to sell almost half of its stake in Peanuts, the 70-year-old cartoon created by Charles M. Schulz, in an effort to reduce debt and expand the brand’s success in Asia. DHX will own 41 per cent of the brand, Sony 39 per cent and the Schulz family 20 per cent when the transaction closes in June.

But positive reactions to the deal — the price was a premium to the US$345 million DHX spent to buy 80 per cent of Peanuts and all of Strawberry Shortcake last spring — weren’t enough to quell pessimism surrounding the financial results released Monday.

DHX’s stock price plummeted 20.5 per cent to $3.37 on the Toronto Stock Exchange after it announced it might suspend its dividend and potentially de-list from the NASDAQ to save money as part of a strategic review that will be completed by June 30.

It also reported a loss of $8 million for the three months ended Mar. 31, missing analysts’ expectations on revenue, adjusted earnings and margins. The company stopped providing a financial outlook given uncertainty around licensing agreement negotiations, although it noted it is in advanced discussions for a variety of opportunities that could have material positive impact.

In a conference call with analysts, executive chairman and chief executive Michael Donovan acknowledged the headlines aren’t positive, but said “a lot of the negativity is just noise.”

Management noted challenges in the agency business and continued erosion of the TV market, but said it is focused on “extreme cost management” and has made executive changes to return to sustainable growth.

He pointed to positive momentum with DHX’s strategy for a digital world, which is to focus on and invest in a smaller number of key brands like Peanuts, Caillou, Polly Pocket and Mega Man. It intends to build these brands on WildBrain, which offers preschool videos on platforms like YouTube, where most kids consume content. DHX hopes to capture the premium market with its top brands as well as the volume market through WildBrain.

Expanding the Peanuts brand is a key part of this strategy. The Sony partnership brings an “unbelievably important” intellectual property rights management business into the fold, Donovan said.

Sony has doubled the Peanuts business in Japan since it became the agent in 2010, according to DHX.

“Its success in that market provides a template for success in other markets, particularly other Asian markets, particularly China,” Donovan said, adding partnerships will be key.

“We know that it has tremendous provenance in the country, yet the monetization from China is de minimis … we see China as the game changer for both this company and for that brand.”

Analysts congratulated DHX on the deal, but were more focused on the uncertainty going forward.

“While certain parts of the DHX business model are inherently difficult to predict and thus we understand the challenges of providing annual guidance, the absence of any financial guidance adds a significant degree of uncertainty to our forecasts further raising the risk profile of the stock in our view,” RBC analyst Drew McReynolds noted to clients.