OPINION: The Power of the Licence

Daniel Domberger from international investment banking boutique Livingstone Partners explores the ins and outs of the character licensing market and the reasons for increasing private equity interest in the sector...
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The term credit crunch means nothing to children. Thanks to seemingly endless merchandising links with film and television programmes, their hunger for a Hannah Montana or Indiana Jones t-shirt, toy or trinket is limited only by their parents’ willingness to indulge them, and the retailers’ ability to get the right product on the shelves.

The right licences can help shift otherwise unexceptional product, and retailers with access to the right character merchandise are likely to capture a larger share of shrinking discretionary consumer budgets. This helps shift some of the power – and the pressures and risks that go along with it – away from the retail buyers and into the hands of the licensees, especially those with exclusive rights to ‘hot’ properties in core categories.

These characteristics have encouraged investors to focus on character licenses as a small, but increasingly valuable and visible, part of consumer spending. With most licensees still focused on well-defined but narrow niches, the market is ripe for consolidation – and private equity investors love consolidating markets. At the same time, licensors like to work with groups they can trust and with whom they can build closer relationships, while retailers are looking to reduce their numbers of core suppliers. There has been a series of investments in specialist companies focused on licensed-based product, as investors identify potential sources of product differentiation.

Blues Clothing is a good example of this. The company designs outerwear and leisurewear for kids, using some of the latest hot licence franchises such as High School Musical, as well as more mature, evergreen brands such as Disney, the Simpsons, and Power Rangers. With support from private equity investors Penta Capital, which backed Blues last year, the company now has even greater financial firepower and with it the scalability to expand in to new product categories, support larger minimum guarantees, and to seize market share.

Similarly, RJD Private Equity invested in UK-based licensed household textile company, Character World, earlier this year, identifying another niche where the differentiation offered by a license helps overcome consumers’ natural inclination to choose product on price alone, and hence helps increase the stability of sales. With new licences continually being released, there’s an endless opportunity for product refreshment and hence for long-term profitability – of critical interest to financial investors in uncertain times.

Size matters
Once they’ve bought into the sector and understood the subtleties that characterise it – such as licence agreements which favour the IP owner, and the structure of minimum guarantee payments – private equity investors will be keen for their companies to grow quickly and achieve real critical mass. Acquisition can open up new strategic horizons to help them get there. For example, private equity-backed Italian toy company, Giochi Preziosi Group (GP) acquired UK-based Flair Leisure Products in April of this year.

Through its acquisition of Flair, GP has deepened its UK presence with popular toy brands including Sylvanian Families, K’nex, Plasticine and Sticklebricks, extending its European coverage over the key UK market. This pan-European distribution, coupled with GP’s own licensing, design, and retail presence, gives them increased clout when dealing with IP owners and with retailers, and is key to making them an attractive acquisition target when they and their private-equity backers decide to exit.

Toys are not just child’s play
Another example of recent growth by acquisition is Hornby’s takeover of Corgi Classics. Although Corgi has struggled recently, its sits well within Hornby: by incorporating the die-cast model maker into its portfolio of brands, Hornby acquired the hat trick of planes (through its acquisition of Airfix in 2006), trains and, now, automobiles.

Like licensed product targeted at children, adult nostalgia and collectors’ toys make up a small but increasingly valuable segment of the market, offering significant potential returns to investors. With formerly private equity backed Corgi integrated into its business, Hornby hopes to revitalise its image and product offering with merchandise linking into film and television programmes, such as Batman (a boxed 1960s Corgi Batmobile recently sold at auction for £900), the Avengers, Doctor Who and, for the younger generation, Harry Potter.

We tend to think of character-related textiles, toys and collectables as discretionary items in times of economic recession. But with ever-widening consumer choices, it helps to be able to stand out from the crowd, and consumers are more likely spend their money on products bearing brands which evoke loyalty, whether for themselves or their children, even if it means a pound or two more.

The increased competition for shrinking consumer budgets makes the differentiation of licences more attractive, and the sector can expect ongoing interest from private equity investors. The next few years will likely see further consolidation of licensees, ultimately resulting in a greater range of licensed products available to the consumer. Times may be tight and licenced merchandise slightly more expensive, but keeping our kids happy is worth its weight in gold.

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