Hollywood Fire Sale: Overheated Acquisition Costs for Content Companies
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It’s a great time to be a content company. Over the past six months or so, there’s been a flurry of M&A chatter and activity among studios and production companies, as the race for quality content gains steam.
The red-hot streaming wars have proved that content is king, and the competition has gotten so fierce companies are willing to pay hefty premiums for the chance to own the intellectual property behind the next megahit.
The reported price tags and valuations of major recent deals have been jaw-dropping. Though there was a ton of chatter of possible sales and mergers, Reese Witherspoon's Hello Sunshine was one of the first big deal announcements in the content space this summer, when former Disney execs Kevin Mayer and Tom Staggs’ Blackstone-backed media venture snatched up the company for $900 million.
Since then, Mayer and Staggs’ still unnamed media company acquired children's franchise “Cocomelon” creator Moonbug Entertainment for a whopping reported $3 billion. While the duo was reportedly in talks to purchase Will Smith and Jada Pinkett Smith’s entertainment company Westbrook Inc., the discussions fell through after about a month in October.
The latest major sale was Endeavor’s studio business, Endeavor Content. For about $1 billion, Korean media giant CJ ENM will have 80% control of the company.
The list is growing rapidly, and the recent content land grab had many scratching their heads at the sky-high valuations. Still, there are a couple things to consider, as the nature of the content business has changed dramatically amid the shift to a streaming-first world.
First, the valuations being reported include earnouts, which is a contractional arrangement in which the seller can pocket additional compensation if the business meets certain financial goals. The reported figure of $900 million for Hello Sunshine and $3 billion for Moonbug is at the high end of the range.
And much like tech investing, content acquisitions these days are based on potential rather than current earnings. For instance, LeBron James’ company is expected to grow its revenue 67%, to exceed $100 million over the next year or so. James’ SpringHill Co. announced in October it would be selling a minority stake to investors including RedBird Capital Partners, Fenway Sports Group, Nike and Epic Games, which valued the company at $725 million.
Finally, most of the money being pumped into the content acquisitions is coming from private equity. It’s been a good couple years for private equity as the stock market flirts with record highs. They have the capital to spend millions, and even billions, to make big bets on media companies with highly desirable IP. And there’s a lot of money out there to be spent while not necessarily an abundance of content players out there to be bought. Hence, the big valuations we’re seeing in the market.
Whether this new fad of paying big bucks for content is the start of a meaningful trend remains to be seen, especially since there’s no guarantee that every single acquisition will be a smart buy with great ROI.
But the aggressive move to ramp up quantity in hopes of some hits is a strategy that has worked in the past. Case in point: Netflix. The streaming giant has seen great success with its strategy of prioritizing content quantity above all else, though it would probably argue that it delivers on the quality front as well.
The legacy media companies are trying to catch up, and their newer streaming services don’t have the scale and variety that Netflix has — not even Disney. Yes, Disney has valuable IP through brands like Marvel and Pixar, but it lacks the variety that rival Netflix boasts. That was evident when it reported its latest quarterly results in November. Subscriptions for Disney+ slowed dramatically after the initial surge it saw following its unintentionally well timed pre-COVID launch two years ago.
Content costs money, and to some it makes more sense just to purchase the content companies if they’re going to shell out the big bucks to buy up programming anyway. As 2021 draws to a close, it’s likely we will see even more M&A activity in the new year.