Canaccord downgrades Entertainment One after it rejects ITV bid

Canaccord Genuity lifted its price target on Entertainment One to 236p from 225p and cut the recommendation to ‘hold’ from ‘buy’ after it rejected a preliminary approach from ITV valuing the stock at 236p per share.

The brokerage said the likelihood of another offer, that would be acceptable to ETO shareholders, is currently unclear but the potential strategic rationale makes it a possibility. In addition, the bid provides a useful benchmark for valuation purposes.

“Further upward moves are likely to be dependent on ITV tabling a higher bid,” Canaccord said.

It noted the share price is now trading broadly in line with its revised target price after the surge of around 10% Tuesday and further gains of 10% on Wednesday.

Canaccord had argued in the past that there could be a strategic rationale for ITV wanting to buy the business, given its focus on content in recent years and the increased scale/international diversification a deal would bring.

“However, ETO's goals have been clearly communicated - its management team aims to double the size of the business, and as yesterday's RNS illustrates, the board clearly sees greater value in the assets than the 236p approach, which would put the stock on a 9.3x calendar 2016E EV/EBITDA based on our estimates.”

The Toronto-based film and TV distributor said on Wednesday that its board had unanimously rejected ITV's offer as it "fundamentally undervalues the company and its prospects”.

At 1220 BST, Entertainment One shares were up 0.1% to 240.33p.