Spectrum Tags Classic, Gears For Run At Hit –

The timing couldn’t be better. Spectrum Equity Investors approached Classic Media about a possible investment early last year, and finally agreed to acquire the business through a recapitalization earlier this month-just as reports were coming in that Classic was the mysterious third bidder in the budding auction for Hit Entertainment.

Spectrum’s acquisition is by no means hinging on the purchase of Hit Entertainment, but the firm’s presence should certainly help Classic keep pace. Hit was originally put in play in January when it was in late-stage discussions about a possible sale, and in March, Apax Partners emerged with an agreement to buy the company for GBP475 million. Soon after, though, Lions Gate Entertainment butted in with a competing offer, and Classic later surfaced as the third bidder. The Lions Gate bid now reportedly has the backing of Kohlberg Kravis Roberts & Co., while the Classic bid is said to have additional private equity support from Thomas H. Lee Partners.

But whether Classic wins that deal or not, Spectrum anticipates the company will look at other potential purchases going forward.

Classic already controls over 3,000 entertainment titles, consisting of movies, television specials and TV series. Among the more notable names in its collection include Lassie, The Lone Ranger, Underdog, Casper the Friendly Ghost, Mr. Magoo, Frosty the Snowman, and Rocky & Bullwinkle. Additionally, Classic is the No. 3 rights holder of comic books, and with Random House as a shareholder in the company, Classic co-owns Golden Books and maintains media rights to the publishing catalog of Random House.

“We were particularly attracted to the company’s content,” Spectrum General Partner Robert Nicholson told Buyouts. “The combination of the stable, high cash-flows from the library and the growth inherent in the business made this a very appealing deal for us.”

The stable cash flows Nicholson refers to stems from the multiple revenue streams that come out of Classic’s catalog. Home video sales, commercial use, the sale of television or movie rights, and even ancillary products, such as toys, all give the company steady and consistent growth. Classic, for example, has set up distribution deals for a new Lassie movie currently in production, and the company has already started hocking Lassie-branded products, such as pet supplies.

Classic was launched in 2000 with $50 million in private equity backing. The company made a number of acquisitions, including deals for UPA Productions, which controlled Mr. Magoo, and its most recent deal for VeggieTales publisher Big Idea, which Classic acquired out of bankruptcy protection. The company today generates a reported $100 million in annual revenue.

The value in Classic, Nicholson says, comes from the reputation of the titles in its catalog. “There’s a difference between creating a stable library with proven content and just buying old titles… Old content is just old; classic content implies there’s a level of recognition and brand identity, and that makes future investments in new production that much more low risk.”

“[The company] has kept a very low profile, and they’ve been able to grow while flying below the radar screen. Our involvement is obviously to help Classic grow and help build the library,” Nicholson added.

He would not comment on the Hit Entertainment auction, but Nicholson did say that future acquisitions would likely resemble past deals, and the company would continue to target proven youth-oriented content. However, Classic won’t just target the immortal shows from bygone eras. “It may be a mix of well-known forgotten brands or contemporary properties,” Nicholson noted.

Under the terms of the deal, Spectrum invested $75 million of equity and arranged a $100 million senior debt facility, led by J.P. Morgan. Classic’s original backers, Pegasus Capital Advisors and Random House Ventures, will continue to hold minority stakes in the business. Spectrum used its fourth fund, the $1.95 billion Spectrum Equity Investors IV, LP, for the deal. According to SEC filings, Spectrum is currently raising its fifth vehicle, which has a $1.5 billion cap and has amassed roughly $893 million.