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Entertainment Rights, the media group behind the relaunch of Basil Brush, is working hard to capitalise on the boom in demand for intellectual property. Like rivals, such as Britt Allcroft and HIT Entertainment, it is busy setting up deals to turn its characters into global icons. But, as the high-profile difficulties of companies such as Character Group and Dorling Kindersley have shown, managing the rights to brands such as Basil and Star Wars is not all fun and games.

Entertainment Rights, the media group behind the relaunch of Basil Brush, is working hard to capitalise on the boom in demand for intellectual property. Like rivals, such as Britt Allcroft and HIT Entertainment, it is busy setting up deals to turn its characters into global icons. But, as the high-profile difficulties of companies such as Character Group and Dorling Kindersley have shown, managing the rights to brands such as Basil and Star Wars is not all fun and games.

When Mike Heap, ER's chief executive, led the reverse takeover of the former Sleepy Kids group in January 1999, it had an annual turnover of £156,000 and was £6.6m in the red. Since then, he has taken the number of programming hours which the company owns from 50 to 230. The new Entertainment Rights reported narrowing pre-tax losses yesterday of £0.49m for the six months to 30 June on sales of £1.6m, a day after it announced it had bought the distribution rights to the Harvey comic cartoon library for £1.4m.

Mr Heap, a former Warner Music executive, says the secret of ER's success has been to juggle a portfolio of properties to ensure a constant stream of revenues. "Exactly as in the Seventies where there were lots of little independent record companies who had one big hit and then a run of flops, it is crucial to have a broad catalogue [of characters] to keep yourself going," he says.

Typically, a rights-owning company will license a series to a television station for two to three years. The television group will pay an up-front sum, which is later followed by a second, interim payment. "The problem is there is then a period when you don't get any money because you are waiting for the rights to return to you. At that point, if you don't have a basket of properties that can be constantly generating cash, you can get into financial problems," says Mr Heap.

It was this thinking that led the ER boss to acquire the exclusive rights to Basil Brush just months after taking control of Sleepy Kids. He later bought Carrington Productions International, a rival intellectual property firm backed by Trevor Hemmings, the leisure entrepreneur.

As a result, ER's programme library doubled. The acquisition added the legendary character Zorro and the children's classic The Fantastic Voyages of Sinbad the Sailor to a portfolio which had previously been dominated by Basil and the Duchess of York's book and cartoon series, Budgie - The Little Helicopter. CPI helped to increase the group's cash flow, allowing Mr Heap to spend more on distribution and on developing new ideas through Siriol, the company's Cardiff-based production studio.

"Fifty hours of programming doesn't really give you the critical mass to be able to afford the infrastructure that is needed to run your own sales force," Mr Heap says. "One of the keys in the IP [intellectual property] business is to control your own destiny. You want to be the person who is developing the products, who is selling the products, who is marketing the products, and choosing the licenser. The plan that we were working to was to control all of the various elements."

Crucially, ER is the sole owner of all of its properties, giving it the ability to resell programmes and merchandising rights to third parties, including TV channels such as Nickelodeon and Cartoon Network, and retailers such as Wal-Mart. These companies then jointly shoulder the risk that the character or series will flop. It is this distinction which has helped to protect ER from the difficulties experienced by Character and Dorling Kindersley.

In August, the board of Character was forced to issue a profit warning after a run of poor sales and spiralling restructuring costs. It said losses in the second half of the year were "unlikely to be significantly less than those experienced in the first half", when the group posted a deficit of £4.1m. The company wrote off about £3m of stock, much of it related to Star Wars: Episode 1 - the Phantom Menace, the George Lucas film which broke box-office records but failed when it came to spin-off sales.

Overestimating demand for Star Wars merchandise was also the downfall of Dorling Kindersley. The publisher had to write off £14m for 10 million unsold Star Wars books and later agreed to be bought for £311m by Pearson, the Financial Times-to- Neighbours media group.

Two of the more successful companies in the sector are Britt Allcroft and HIT Entertainment. Like ER, both have either partial or total ownership of the characters they manage, although HIT specialises in developing new ideas and then selling out to others. It also handles distribution for some of its competitors, including CPI before the sale to ER.

Britt's best-known assets are Thomas the Tank Engine, Captain Pugwash and Sooty, while the stars of HIT's portfolio are Bob the Builder and Angelina Ballerina. The two groups were set to merge earlier this year but the talks collapsed after they were "unable to obtain satisfactory financial terms" for a deal.

Asked whether there is still room for consolidation in the industry, Mr Heap says: "That is very often one of the most obvious ways of taking a business forward. We talk to everyone all the time. We are always looking around and we spend a considerable amount of time in discussions with different parties."

Mr Heap admits that he could be interested in acquiring the soon-to-be-spun-off intellectual property arm of Chorion, the nightclubs company which owns the rights to books by Agatha Christie and Enid Blyton: "Those are discussions that will go on," he says.

But Simon Davies, an analyst at ABN Amro, says ER could face competition from foreign groups such as Germany's EM.TV, which recently bought the rights to both The Muppets and Formula One racing.

"One problem all the UK players face is that there are an awful lot of these companies listed on the Neuer Markt," Mr Davies says. "And they are fantastically highly rated, which gives them an advantage when it comes to bidding for characters that come up for sale."

Mr Davies says that if the likes of HIT, Britt and ER continue to grow, either organically or through acquisitions, they could also become vulnerable to a takeover by Disney or Time Warner, the US entertainment giants. "At the moment, they [the UK groups] are scarcely on the radar screen. But as they develop and grow, a sale to Disney or Warner would be entirely logical."

For Mr Heap, being swallowed by Warner would seem like a case of deja vu. He has already worked for the company twice, first in the records division, which he headed in the UK, and later at Warner Home Video, where he came up with the profitable idea of selling Friends, the Channel 4 programme, on tape.

In between, he left to set up his own record company, Legend, which was behind the relaunch of Elkie Brooks, the singer. Now Mr Heap is hoping for a similar success with Basil Brush.

The tweedy fox has already been signed up for a sit-com, starring as the resident guest of an American family on Wimbledon Common. There are also rumours of an appearance on BBC1's the Generation Game. Mr Heap says that, at a conservative estimate, Basil should be worth £50m to £60m. After an initial outlay of £2.3m in shares, that should send the pair of them laughing all the way to the bank.

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