HIT Entertainment PLC

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HIT Entertainment PLC

Maple House
149 Tottenham Court Road
London WIT 7NF
United Kingdom
Telephone: (+44) 20-7554 2500
Fax: (+ 44) 20 7388 9321
Web site: http://www.hitentertainment.com

Public Company
Incorporated: 1989
Employees: 92
Sales: £20.3 million ($30 million) (2000)
Stock Exchanges: London
Ticker Symbol: HTE
NAIC: 512110 Motion Picture and Video Production

Up and comer HIT Entertainment PLC (the HIT originally stood for Henson International Television) wants to be the world’s leading independent developer of television characters for the preschool set. With a strong stable of existing media properties—including U.K. mega-hit Bob the Builder, recently imported to the United States, the dancing mouse Angelina the Ballerina, and Kipper the dog—the London-based company has taken a giant leap into the U.S. market. In February 2001, HIT Entertainment reached an agreement to take over Texas-based Lyrick Corp., the developer of smash success Barney the Dinosaur. The deal, worth more than $275 million in cash and stock, has catapulted HIT’s market capitalization to more than £600 million (the company posted just £20.3 million in revenues in 2000), and will result in a company with total sales worth the equivalent of some $200 million. Production of the Barney operations, which include a new 40-show deal with PBS to extend the dinosaur’s run to at least 2007, as well as a new licensing deal with Fisher Price Toys to begin in 2002, will remain in Texas, even as HIT uses its international connections to make a fresh attempt to take Barney worldwide. Meanwhile, Lyrick’s strong distribution network in the United States provides HIT with instant access to the U.S. retail market, where the company will promote its Bob the Builder and other series. Bob the Builder, which began broadcasting on Nickelodeon’s Nick Jr. cable television channel in January 2001, has already proved one of the fastest-growing preschool programs in the United States. Through its HIT Wildlife division, the company is also a leading producer of wildlife and nature programming. HIT is led by CEO and founder Peter Orton, who formerly worked for the Children’s Television Workshop and The Jim Henson Company. Following the Lyrick acquisition, HIT became tipped as a possible purchaser for Orton’s former employer, after Germany’s GM.TV, which acquired The Jim Henson Company in 2000 and then ran into financial problems, was seeking a buyer for its new acquisition.

Distributing Success in the 1990s

HIT Entertainment already boasted a prominent pedigree when Peter Orton founded the company in 1989. Having formerly worked for the Children’s Television Workshop, and then following Muppets creator Jim Henson into the formation of The Jim Henson Company, Orton became head of Henson International Television, the company’s international distribution arm. When Disney began talks to acquire The Jim Henson Company in the late 1980s, Orton and other employees at Henson International Television convinced Jim Henson to allow them to spin off the distribution arm as an independent distribution company. Henson agreed, and Orton persuaded his coworkers in Henson International Television “to hold hands and jump off the cliff,” as Orton told the Independent. Taking the initials from the division’s former name, Orton established HIT Entertainment, based in London.

HIT’s business initially remained limited to distributing character properties. Among the company’s early products were popular British series Postman Pat and the long-running Alvin & the Chipmunks series. Other popular programs financed and distributed by HIT Entertainment included animated features based on classic children’s books such as Wind in the Willows and the Peter Rabbit books. Helping to fund the company was an investment by British satellite and cable TV operator Flextech made in 1990, which bought 23 percent of HIT for approximately £600,000.

In the early 1990s, HIT began to branch out into programming production, notably with the formation of a new division, HIT Wildlife, in 1993. The new division began producing wildlife and nature-oriented programming. HIT Wildlife rose to become one of the company’s chief revenue generators, claiming as much as 35 percent of the company’s sales by the mid-1990s. As Orton pointed out to Kids TV, “With wildlife [series], you can dub them and they carry no cultural baggage. Usually, if a drama is sold to 15 or 20 markets, that’s a lot, but these series can go to many more.”

HIT’s foray into nature-oriented programming quickly gave it a taste for production in its other core area, that of children’s programs, and particularly programs for the preschool market. That market had been undergoing dramatic changes since the days when Orion’s former employer’s Muppets, and especially their initial vehicle, Sesame Street, ruled the toddler set. The appearance of a new character—a purple dinosaur named Barney—in the late 1980s had opened an entire new category of children’s programming.

Created by Sheryl Leach, reportedly in order to entertain her hyperactive child, the Barney character was to sweep the preschool set off its feet, and became one of the most popular and highest-selling characters of all time. By the early 1990s, Barney and ancillary products were bringing in some $250 million per year for Lyrick Corp., the Texas-based company set up by Leach’s father-in-law Dick Leach to develop the Barney character. HIT was able to become part of the Barney phenomenon by handling international distribution activities for the character.

The success of Barney and the growing popularity of other preschool directed characters, which were later to include such unusual stars as the Teletubbies, encouraged HIT to begin production of its own stable of characters. Instead of simply distributing characters and their series, HIT now sought to become involved in their development—not only producing television programs, videos, and films, but also in controlling lucrative licensing activities. In order to fund this transition, the company went public, listing its shares on London’s AIM market in 1996. The listing gave the company a market capitalization of just £18 million, but enabled it to launch its new HIT Video division, which began production of video programming targeting the company’s core preschool audience.

A new character came to the company’s attention in 1996, when advertising executive and would-be cartoonist Keith Chapman pitched his idea to HIT Entertainment. Chapman’s character was a little builder named Bob the Builder, with such friends as Scoop the Digger, Muck the Bulldozer, and Roley the Steamroller. While a number of other producers had turned down the idea, HIT recognized its potential and bought the rights to developing the Bob the Builder character into a television series. The following year, HIT joined the London Stock Exchange’s primary market, boosting its market capitalization to £50 million and raising an additional £8 million through a rights issue. The new funds went toward the production of the company’s first three programs: Brambly Hedge, Percy the Park Keeper, and Kipper, a series about a dog that became the company’s first hit series.

Building a Preschool Empire for the 21st Century

HIT opened its own animation studies in 1998, dubbed HOT Animation. The company also launched its Consumer Products Division in order to generate revenues through character licensing. By then, the company’s Kipper series had proven a hit across the United Kingdom. Initially broadcast on Britain’s ITV network, Kipper was brought across the Atlantic, when HIT signed a broadcasting deal for the series with the Nickelodeon television network. That deal was just the first for HIT, as it quickly lined up buyers for a number of its other series in the United States. By the end of 1998, HIT had an impressive customer list, including Starz/Encore, which bought the Brambly Hedge and Percy the Park Keeper series; and HBO Family, which bought HIT’s Anthony Ant cartoon series. The company’s wildlife programming was also finding success in the United States, with the Animal Planet channel buying the rights to air Wyland’s Ocean World.

By then, HIT had also found an eager buyer in the BBC for the Bob the Builder program as development of the initial installment of the series, created in the company’s HOT Animation studios, neared completion. At the same time, HIT’s Kipper series went on to win the BAFTA award for Best Children’s Animation, as HIT built on its reputation for quality animation—in an era that was witnessing an increasing number of cheaply animated Japanese series flooding the world’s children’s programming markets. A new offering of shares, raising an additional £14 million in development funding, helped boost the company’s market capitalization to £82 million by the end of that year.

Key Dates:

1989:: Peter Orton founds HIT Entertainment, which formerly operated as the distribution arm of The Jim Henson Company; worldwide distribution deals are signed for Postman Pat and Alvin & the Chipmunks.
1990:: Flextech invests in HIT.
1993:: Company launches production of wildlife programming under HIT Wildlife.
1995:: HIT opens office in Los Angeles.
1996:: Company goes public on British AIM market; acquires Bob the Builder license.
1997:: HIT joins London Stock Exchange primary market; launches HIT Video division; begins inhouse properties development: launches Brambly Hedge, Kipper, and Percy the Park Keeper.
1998:: Company starts HIT HOT animation studios; forms HIT Consumer Products division.
1999:: HIT launches Bob the Builder television series (U.K.); forms HIT Consumer Products USA division.
2000:: Company announces five-for-one stock split; reaches agreement with Nickelodeon for Bob the Builder series in the United States; agrees to licensing contract with Hasbro for Bob the Builder products.
2001:: HIT announces acquisition of U.S.-based Lyrick Corp. and Barney the Dinosaur rights; signs worldwide licensing contract with Fisher Price Toys for Barney products.

At the beginning of 1999, HIT, which by then boasted ten first-run series on American television, launched a new Consumer Products USA subsidiary to exploit the growing success of its characters on that market. The company took a leap into television history, however, when Bob the Builder finally made his television debut on the BBC in April 1999. The series proved an instant hit among the United Kingdom’s preschool market. Surprisingly, the show quickly gained popularity in other markets as well, and by the end of 1999, Bob the Builder was recognized as the United Kingdom’s fastest-growing preschool series character.

After a new stock placement in July 1999, which raised HIT’s market capitalization to £170 million, the company performed a five-for-one stock split in January 2000. HIT began preparing to bring Bob the Builder —which achieved quick success in Germany as well—to the vast U.S. market, inking a deal with Nickelodeon in December 1999 that called for 78 Bob the Builder episodes and broadcasting rights for five years. HIT had also built up a strong merchandising business for Bob-related products, which sold for more than £60 million through 2000. HIT was also continuing development on a number of new character projects, including production of a TV film called Faeries, which HIT hoped to develop into a full-scale series franchise. The company was also rolling out a new character series based on a dancing mouse, called Angelina the Ballerina. That series, which the company expected to bring to the United States, was backed by a five-year licensing agreement signed with Mattel at the end of 1999.

HIT, which had long been suggesting that it intended to expand its character stable through acquisitions, nearly found a partner in early 2000, when the company held talks with Britt Allcroft, the British company that held the licenses to such popular characters as Thomas the Tank Engine, Captain Pugwash, and Sooty. The two sides were unable to agree on a price, however, and the merger fell through. HIT continued to search for a new acquisition, while concentrating on the growing fortunes of Bob the Builder. The series’ enormous popularity in the United Kingdom continued to build throughout 2000, culminating with the release of the first Bob the Builder song and CD. The song, released during the all-important Christmas season, quickly grabbed the number one spot.

Soon after, Bob the Builder debuted in the United States. The series began airing five times per week on Nickelodeon’s Nick Jr. station in January 2001. By the end of February, the show already boasted an audience of more than 12 million— and had taken the top spot among the most popular preschool children’s characters. The success of the Bob the Builder series was also set to blossom into a wide variety of licensed products, with strong revenues more or less guaranteed. The launch of the Bob the Builder video was scheduled for May 2001, with an initial run of 500,000 copies. At the same time, the company reached an agreement with Sears to set up 850 “Bob Shops” across the retailer’s countrywide network. Even before HIT’s Bob the Builder merchandising effort got underway, demand was already building. As Peter Orton told the Guardian in March 2001, “We’re already getting reports from Florida of British children on holiday being rugby tackled by American kids looking to snaffle their Bob branded towels and clothes.”

HIT Entertainment had by then done a bit of “snaffling” of its own when it announced in February 2001, its acquisition of Lyrick Corp. and its Barney the Dinosaur and other characters. The deal, which included a cash payment of $110 million and newly issued HIT shares collectively worth $160 million, helped boost HIT Entertainment’s market capitalization to more than £600 million. It also gave the British company Lyrick’s powerful Barney-based retail distribution network. As Orton told the Toronto Star, “What it does immediately for us is create a relationship that would take us 10 years to achieve if we were doing it on our own, which would be to get into Wal-Mart, get into Target, get into these major retail outlets.” Meanwhile, if Barney no longer quite inspired the success of its early 1990s heyday, it remained one of the most popular preschool children’s characters in the United States. The character’s limited penetration overseas also presented HIT with the opportunity of developing new international markets. Meanwhile, the Lyrick acquisition was immediately backed up by three important agreements, the first, an extension of Barney’s PBS contract, with an agreement to purchase 40 new programs and extend Barney’s run until 2007; the second, a new deal with Fisher Price Toys to develop and market a new range of Barney toys and games, beginning in 2002; and the third, the transfer of Lyrick’s money-losing publishing operations to a third-party publisher, which guaranteed at least seven-figure sales.

The Lyrick acquisition put HIT Entertainment on the world map. If the company remained tiny compared to such industry heavyweights as Disney, HIT’s ambitions called for the company to build up a leading position in its core preschool market. The company was also interested in pursuing new acquisitions. One possible target was seen in Orion’s former employer, The Jim Henson Company. That company had been acquired by Germany’s GM.TV in 2000. Yet, when GM.TV, which had also acquired a 50 percent share in Formula One racing rights, began facing financial problems, Henson Company was widely tipped to be sold off again. Fast-growing HIT Entertainment, which continued to be led by Henson alumnus Orton, seemed like a natural to build the next home for the now classic Muppets.