(SIDE NOTE 1: Sorry about not posting last week. Life is a rollercoaster, but we are back!)
(SIDE NOTE 2: Watch the video below! I am trying to use more audio/visuals to accompany these articles.)
Ambler’s Cut has used the past few weeks to preform a bit of an analysis of specific deals and production company valuations. As a result, we have made a puzzling discovery that we feel no one is paying attention to.
Let's simply start with two headlines:
Just a reminder: in 2019, Hasbro acquired Entertainment One (EOne) for a hefty $3.8 billion. Fast forward to 2023, and Lionsgate procured Eone at a significantly reduced cost. To make sense of this, we need to delve a bit deeper, leading us to the second headline.
In 2021, Reese Witherspoon's Hello Sunshine earned an impressive price tag of nearly a billion dollars. Notably, this transaction occurred when the company was merely five years old, with only
four films and six television series under its belt.
Comparing this to Entertainment One, which boasts a content library comprising 6,500 titles and numerous titles currently in production, the obvious question appears. Despite its extensive and diverse content catalog, Entertainment One was valued at only half of what Hello Sunshine was deemed worth.
This is the point where we realized something was wrong, and the valuations of these production companies did not make sense. So we decided to take a deep dive.
The Entanglement of Celebrity Production Companies and Private Equity Firms
There are multiple celebrity production companies that have shown a similar pattern in behavior. Lebron James’ The SpringHill Company, for instance, recently secured a significant minority stake from an investor group, reaching a valuation of $725 million. Tom Brady’s Religion of Sports successfully raised $50 million, while Brad Pitt and Jennifer Aniston’s Plan B sold 60% of the company to the French media conglomerate Mediawan. Additionally, Ben Affleck and Matt Damon launched a production company after securing a substantial $100 million investment from RedBird Capital Partners.
It is clear that private equity firms are assigning remarkably high values to celebrity production companies. The puzzle deepens when considering the industry's forecast and the anticipated reduction in productions due to the 2023 strikes. Remarkably, what seemed entirely reasonable in 2019 now appears more irresponsible in light of these recent developments.
The Content Frenzy and Consolidation Era
In 2019, private equity firms likely viewed investments in these companies as highly promising. The beginning of the 'streaming wars' and the demand for an endless waterfall of content made such investments appear like a good idea. Larger studios also embraced this trend, heightening their production capabilities to meet the demands of the streaming era.
During this period, Amazon made headlines by announcing an $8.45 billion deal to acquire MGM Studios in May, while Reese Witherspoon's Hello Sunshine was sold for $900 million to an unnamed media company backed by Blackstone.
Fast forward to today, and these promising investments and transactions now seem down-right crazy! Many studios, including Amazon, recognize a contraction in the industry. Consequently, they are scaling back original content production departments, particularly in markets like Asia and Africa. In John Koblin's "Streaming's Golden Age is Suddenly Dimming," he noted, "the number of adult scripted series ordered by TV networks and streaming companies aimed at U.S. audiences fell by 24% in the second half of this year (2022), compared with the same period last year (2021). Compared with 2019, that is a 40 percent drop."
These statistics unmistakably show a significant contraction within Hollywood's content department. Given such trends, Amazon's decisions can make them look like a monster, but really and truly they are just ahead of the curve.
The Content Conundrum
As fewer shows are being produced, production companies such as Entertainment One and celebrity-driven companies are inevitably facing tough times. Any investor or buyer would be concerned. So, what makes this all so appealing?
One of the best ways to show just how absurd this situation has become is by looking at the content library associated with both celebrity companies and entities like Entertainment One. The Ankler recently drew up the valuations of these companies with their library content in order to show a 'cost per title' metric. Essentially, this metric indicated the average price per title in a transaction. In the case of Hello Sunshine, the cost amounts to roughly $42.9 million for a single title, while Lionsgate would be paying $1.8 million per film/TV show.
If this metric does not show the absurdity behind these transactions, then what possibly could?
A Possible Answer
The way Ambler’s Cut sees it with Entertainment One comes down to pure business. Look at the value of the company at its core. It all stems from discounted future cash flows multiplied by the growth rate. When we consider multiples of current cash flows and observe weak growth, the multiples and valuations naturally decrease.
Still doesn't make sense? Discounted cash flow (DCF) analysis is a brilliant way of assessing the current value of an investment based on projections of its future earnings. It basically helps a PE firm like RedBird Capital determine if it is wise to jump on Hello Sunshine or Entertainment One.
The analysis involves evaluating the present value of money to ascertain whether future cash flows surpass the initial investment's value.
So with the sale of EOne to Lionsgate for $500 million, it shows that the company's multiples are REALLY down. If they were up, RedBird Capital would have swallowed them up and put a nice billion dollar bow on them.
But that then begs the question: what the heck do these firms see in celebrity companies? Why do private equity firms invest billions into celebrities and their companies? Private equity firms understand their strategies thoroughly. There is a saying in business, 'do not bet against PE.' They possess the ability to discern the appropriate course of action for these companies and sell them at the optimal time. The vast size of Entertainment One might have been overwhelming for a firm that expected to flip the company over to someone new in a few years.
However, Hello Sunshine could be something that intrigues them due to its small weight, and by marking the company's value up to the heavens above, it is all part of the firm's bigger plan.
At the end of the day, it is all part of the bigger game.
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