TBRD 9.4.25

Those negative working capital dynamics are a pretty big piece of the story that I should not have breezed through or said rather at the end. It completely changes the dynamic. I think it also speaks to the reputation because few players are able to do that. I think it explains why when you look at this and are like, “Why is this so cheap?”, you have a tired shareholder base that is dumping the stock. That is one thing. But I also think this is mistaken to be a typical Hollywood studio business, and that is not what it is. I would almost describe it as a professional services business, almost like a Goldman Sachs or Bain & Co. for children’s animation, with favorable working capital dynamics and a free embedded call option on the likelihood of a home run hit.

I think it’s a fundamentally different business model. When you think about Hollywood Studios, I think they operate very similarly to VC investing in Silicon Valley. So you have a lot of darts being thrown into the board, and one dart compensates for all the losses that you have and drives the vast majority of profits or returns. In the typical Hollywood studio model, you will have a lot of flops, and then you will have one blockbuster hit that makes up for all the flops. In Thunderbird's case, they’re kind of hitting singles. By doing shots on goal each time, where they ensure profit because they presell the content, there is the opportunity for that home run, slam dunk hit. I mean, you look at the stock and it is cheap without the IP development. It’s cheap just looking at it as a multiple of the service production EBITDA. But when you think about the optionality of creating a next Peppa the Pig, which was sold for just shy of $4 billion to Hasbro, if that were to happen, all of the people who bought Thunderbird or were involved in Thunderbird will be able to retire happily for the entirety of their lives. That will cause the stock to be a 200 bagger. I think it’s a quirky little business; I haven’t seen anything quite like it.

They haven’t lost money on it, nor has it been. I don’t think, to my knowledge and my discussions with the company have been scarce. I don’t know if they even disclosed this, but to my knowledge, they do not. Their business model allows them to not really lose money on IP, because they presell the content. Mermicorno, Last Kids on Earth, those were sizable. Last Kids on Earth, which is one of their pieces of their IP, that was in the top 10 watch list, not just for children's and animation on Netflix, but Netflix overall. Someone I talked to, who is an investor involved with WildBrain, which is often referred to as a comp, says that the real value of the way to gauge value of IP and entertainment IP, which is really what media companies refer to as their moat, is to look at whether they lead to high volume, high margin, consumer IP sales. If you do the math, let’s say there is $1 billion in sales of consumer IP for some blockbuster hit. Production that resulted in $1 billion of consumer spending is a huge hit. You’d say maybe wholesale margins on that are 50%, so $500 million in wholesale revenue. Then you would say maybe the royalty economics are 10% of that. So if you’re looking at a real hit that generates $1 billion in revenue, that generates just $50 million in top line revenue, which indeed does flow down to the bottom line. But I think the point made is that it is a lofty aspiration, but I don’t think you necessarily need that slam dunk. Again, if they produce $50 million in incremental EBITDA with 100% margins, then again, this becomes a slam dunk, a huge multibagger. But I don’t think you necessarily need that for the stock to work.

I think what really, when you talk about getting burned on Thunderbird and the multiple being outrageously low, I think people know that Thunderbird launched an auction, a sale process, for the asset, and it did not result in a cash bid. That scares people off because they think something is inherently wrong with the asset. I happen to know, having heard whispers through the grapevine, that the main reason why a sale did not occur was because buyers were worried, namely, financial sponsors were worried about the risk of AI disintermediating and content creation and animation, which I think you can get into a whole other discussion about whether that is a valid risk. I personally don’t think it is. But I think the shareholder base is very concentrated. I think the top five or six shareholders make up 50% of the stock. From my discussions with them, they’re not happy with how things have gone. They want this to be sold. I think when you look at these shareholders, they are probably sellers, net sellers of the stock. I think that’s causing some downward pressure on the stock because people just want a sale process to be finalized already.

I think the story of Thunderbird is interesting also because one of the things about it is that it’s all project based. So it is incredibly asset-light. If Thunderbird wanted to grow 200% tomorrow, theoretically, they could do that because they are really almost project managers who get paid. Once they bid on a project, they get paid by the streamer if they win the project. As they go and assemble a team of contractors to make the content, they do not have employees on the books, and they don’t have to invest their own money into production. So if they wanted to 2x or 3x their output and revenue tomorrow, I think they could do it. I listened to the CEO speak, and I think she is, I am a fan of hers to start off with, but I think they are taking a very measured, risk conscious approach to growing the company and not moving and growing too quickly. But eventually, they’re going to grow to a point where the valuation just becomes ludicrously cheap, and it can’t stay this cheap forever. I think the uplisting is going to give them a lot more liquidity. I think there will be some kind of capital return, which is also going to improve liquidity. I don’t think it is going to be in the form of a dividend. It is going to be in the form of NCIB, a share buyback. That will improve liquidity. I think the issues are liquidity, investors wary of private equity not buying the asset. To your point about IP, I don’t think it’s as much a concern that people want to see it in the numbers – the IP story to turn into reality. I think, frankly, that it’s impossible to model. It’s really a free call option. How do you model a hit materializing for Thunderbird? But I think it’s like you’re constantly flipping the dice, and you’re hedging the bets so that you do not lose money. It’s just a really favorable setup in my case.

She got fired. She was a very nice person, but I don’t think she was the most competent one. That’s a really important point is that you now have Simon who is a much more competent, capital markets friendly CFO. She was, for lack of a better word, a glorified accountant. No, she is a very nice person, but the feedback I got and my impression from when I was hearing her speak in, there was a call hosted by one of these platforms. She was not good, and this comes also from my channel checks with the investor base who did not approve of her. I think you are very right. You have nailed it on the head why this thing is so cheap is because management overpromised and have under delivered. I think the CEO is actually great. I think Jennifer really wants to build something great with Thunderbird. She has faith in building the next Lionsgate Studios. She has faith in building the next Peppa the Pig. She does not want to just do a quick, special dividend, or share buyback. The truth of the matter is I think today, if she started taking the net cash position and doing share buybacks and then plowing the cash flow into doing capital returns, the stock would rerate. But they do not do that for a specific reason. You listen to her talk in past videos, and she says, “I’m super optimistic today about the business.” Today, she continues to reiterate that she has never been more optimistic about the business, and I believe her. I actually truly believe that she, from her experience working in this field, believes genuinely that she’s going to make the next Peppa the Pig. I am team Jennifer. I am not team Voss Capital. I am in this, believe it or not. This is supposedly from my channel checks, this is the New York Yankees of animation or the Goldman Sachs of animation. Who else but them to create the next piece of award winning IP? Someone has to create it, and I think it is going to be them. I’m happy owning this and seeing that strategy to fruition. I think I am getting it on a very favorable cost basis. I think that over time, it will not remain as cheap. I’m not a shareholder who wants to get in, score a 4x return, and then cash out. I actually do believe in the long term story of the IP. I think management has burned their credibility, but they haven’t done things that are disappointing to investors. They never really burned, how should I put it? They under-delivered. They did not sell the asset, which was spooky for investors. They didn’t yet score a home run, but they never said, “We are going to score a home run within the next five years, and it’s going to be this much of a home run, and this is how much we are going to make in the bottom line from that home run.” They’ve only said that eventually, they think if they keep on executing with consistency, they’ll score a big one. So I don’t think they have done anything, a major mess up with the company. I don’t think they have done anything with the business that was suboptimal in how they ran it. I think these investors just are tired of not getting multiple expansion on their investment, but I don’t think they have executed on the commercial side of the business poorly.