Bid gossip may prove a HIT

SHARES in group HIT Entertainment have had a good run, but are still little more than half their peak of 522p three years ago.

The attractions of this stable are becoming more apparent. HIT owns several important 'pre- school' brands - Thomas the Tank Engine, Bob the Builder and Barney the dinosaur. The portfolio also includes Angelina Ballerina and bath toys the Rubbadubbers.

Founded in 1989 out of the empire of Jim Henson, creator of the Muppets, HIT began by distributing children's films such as Peter Rabbit, Postman Pat and Felix the Cat. The shares were floated in 1996 at 163p. In August 2002, it paid £137m for Gullane Entertainment - owner of Thomas - describing this as a 'transforming deal'.

That remains to be proven. Entertainment products and licences are tricky. Children are often more demanding than adults and can switch their allegiance in seconds. Well-known brands can quickly become tired and ex-growth. Bob the Builder is 'mature' in brand terms and revenues fell 12.6% last year. It is critical for HIT to continue innovating and keep its teams of designers motivated in a company structure that has suddenly expanded.

The prize could be great. The merger has created a potential treasure trove of brands, videos and TV programmes at a time when big entertainment groups are scrambling for content for the growing number of digital TV channels for pre-school children.

Although TV is now so fragmented that hundreds of tiny channels churn out cheap rubbish, that makes good children's programmes all the more valuable.

HIT owns more than 1,000 hours of video programmes. That would keep an entire channel going for months. It has hung on to film and theme park rights, which may also be worth a lot.

With giants such as Disney, Viacom and Time Warner on the prowl for programmes, it‘s not surprising that there is bid gossip. Disney is the favoured suitor. That pushed the shares up to 288p this week, but they have subsided to 272p.

Mike Savage, at Bridgewell Securities, expects pre-tax profits of £41.9m for the year to July next and £46.4m the year after, valuing HIT at 15.5 times immediate earnings, falling to 14 times a year on.

He points out that a larger group could easily cut out a hefty slice of the £35m overhead costs.

You may need to be patient. But HIT sells at just eight times cash flow. Its market value of £427m would be petty cash to Viacom or Disney. Worth a punt.