PW lands job as Thomas's fact controller

Institutional and private investors were clamouring last week for a piece of the action in the one great railway sell-off that hasn’t been surrounded by political controversy. Shares in The Britt Allcroft Company – the group that owns the visual and merchandise rights to Thomas the Tank Engine – were placed on the stock market at 130p, but now trade at 160p, valuing the group at almost u38m.

TV programmes, videos, toys and even duvet covers and wallpaper make up the sales mix, with help from a cartoon elephant called Mumfie and a US TV series called Shining Time Station which acts as a ‘wrap-around’ programme in which Thomas the Tank Engine takes a starring role. The US and Japan are huge markets, taking total revenue to almost u12m, with post-tax profits of u1.1m.

But the Britt Allcroft float was unusual in one other respect: it was the first fully-listed company brought to market by an accountancy firm.

Price Waterhouse Corporate Finance won a hard-fought beauty parade to be the sponsors to the issue – the ‘fact controllers’, if you like.

It was a crowning achievement for a team that has been active on AIM, but has set its sights higher.

PW has been the company’s auditor since it was founded by Britt Allcroft and her partner Angus Wright back in 1981, but it was the merchant banking background of team members Peter Clokey (ex-Lloyds Merchant Bank), Jan Freeman (formerly Samuel Montagu) and Adam Hylan (UBS) that clinched the mandate.

Gordon Power, a non-executive director of Britt Allcroft and the managing director of venture capital backers Guinness Mahon Development Capital (see below), said that PW ‘understood the issues, and got on very well with the people’.

The firm also acted as the reporting accountants.

‘Provided you have appropriate Chinese walls, you’re not storing up any conflicts of interest,’ said Clokey. ‘We had a proper reporting accounting team and we formally instructed them as we would formally instruct anyone.’

Mention of companies that ride on the back of intellectual property rights often prompts arguments about the valuation of intangible assets. In Britt Allcroft’s case, the historic costs of making programmes are steadily written off, with no add-back if a programme proves to be more successful than first thought. The Thomas films cost u3.9m, for example, but have been amortised down to u1.2m.

(The mechanics work like this: if a u5m film library that is expected to generate u30m of revenues over its life generates u6m in sales in one year, then 6/30ths of u5m is taken as depreciation.)

There is no UK guidance on how to account for such film libraries, though. ‘The company follows prudent American practices,’ Clokey said, though brokers HSBC James Capel, who are not connected with the issue, say that this policy will ‘artificially boost profits in early years’ for new programmes, and warn that a project failure would hit the balance sheet.

But Britt Allcroft is solidly based on ‘wholesome’, unfaddish family entertainment, not Ninja Turtles or Power Rangers. ‘Thomas is a classic character,’ said Tricia Evans, head of marketing at GMDC. ‘ That character will grow for years. There is nothing about it that is evil.’

GUINNESS MAHON MAKES A CLEAN SWEEP

If Gordon Power looks like a kid with a new train set, it’s because the u250,000 investment in Thomas the Tank Engine he made on behalf of Guinness Mahon Development Capital eight years ago is now worth more than 15 times as much – a compounded return topping 40% a year.

It is a vindication of the strategy that GMDC put together four years ago to be a niche player in venture capital. ‘Whether the set-top box that you put in the corner of your living room is a PC or a television or fed by terrestrial, satellite or telephony, really doesn’t matter if what you’re interested in is turning on and off based on what you see on the screen,’ Power said. ‘That means intellectual property rights.

It means creative ability.’

GMDC runs the u8m Global Rights Fund, most famous for having paid u1.4m to buy glove puppet Sooty. ‘If we only make 20% of what Thomas did, we have a super investment on our hands (sic),’ Power said. The fund also has investments in Link Licensing Group – a company whose licensed product portfolio includes Barbie, Asterix and Creature Comforts – and in a business that unashamedly makes videos that look remarkably like a few Walt Disney classics, but at a fraction of the price.

Guinness Mahon operates at an end of the market that has largely been ignored by most other venture capitalists – underfunded businesses in need of u250,000 to u1m. Many investment ideas come in from the accountants who act for the creative geniuses spread around the UK – most of whom would be afraid of being told to go away by the world’s major multimedia groups. But Sony Music Entertainment is an investor in the Global Rights Fund, which helps investees to break into the world market.

‘You can’t get away from the fact that procreation continues all around and kids are fueled by this sort of stuff,’ Power said of Thomas the Tank Engine – and all his friends. ‘That’s really the macro-economic issue.

While it’s fun to be invested in these things, we put money in because we make money from it.’