Hello Sunshine Sells for $900M and High-Priced Studio M&A

August 18, 2021 by  Chris Erwin

The RockWater Roundup: Podcast Episode Notes and Listener Links

Just a couple weeks ago, a Blackstone-backed media vehicle acquired Reese Witherspoon’s Hello Sunshine for $900 million. Before that, Amazon acquired MGM for $8.5 billion. The list of studio M&A deals and rumors is a long one, with buyers ranging from streaming platforms and traditional media to CPG and blue chip private equity firms.

In this episode, Chris and Andrew discuss the recent high-priced M&A, media valuations on a standalone VS streamer-integrated basis, private equity’s perceived market timing, where the next big talent deals may happen, and new content buyers like FAST platforms, Apple, and Nike.

(and apologies, we had a technical snafu so the recording quality is a bit subpar)

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EPISODE TRANSCRIPT:

 

Chris Erwin:

So Andrew, I’ve been reading a lot of headlines lately about all of the capital investment and M&A of different production and media companies. It actually reminds me of when I first got into the digital space back in 2012, 2013. But we’ll talk about that parallel a little bit later on. There’s a few deals, I think, worth highlighting, but are you reading the same headlines that I am?

 

Andrew Cohen:

Yeah, it’s crazy. We’ve seen a bunch of acquisitions, investments, and then even a lot of rumored ones and the numbers are eye-popping. So it’s…

 

Chris Erwin:

Let’s go through a few of these deals. As always, there’s a laundry list. But most recently, Hello Sunshine was acquired for $900 million by a Blackstone-backed media venture. And of note, that venture, I think, has Kevin Mayer and Tom Staggs, they’re helping to spearhead it. We saw Amazon acquire MGM for around $8.5 billion, and it’s actually, I think 28 times EBITDA, wild. A24, supposedly rumored to be exploring a sale for around $3 billion. Also SpringHill, spearheaded by famed athlete LeBron James, seeking a sale for around three-quarters of a million. And the list goes on. You got Imagine with Ron Howard and Brian Grazer, Legendary Entertainment, Lionsgate Spyglass, et cetera. Any other big deals I’m missing?

 

Andrew Cohen:

I’m sure there are. Especially if you span back over the past year or two, seeing things like Crunchyroll being acquired by Sony for almost $2 billion. STX sold for almost $1 billion last year, and there’s a lot more. We’re seeing these every week and it’s definitely made me sit back and wonder why.

 

Chris Erwin:

Quick clarification. Was STX sold or they’ve just raised seven hundred million?

 

Andrew Cohen:

So it raised and then it merged.

 

Chris Erwin:

So then it begs the question, Andrew, why is there all this market activity? And particularly, I think just over the past two to three months, it feels like there’s been a major uptick. And I think with all the rumors that we just walked through and more, that we can come back after the August vacation and Q3, Q4 is just a wild M&A sprint. So why is this happening?

 

Andrew Cohen:

Like a lot of other pods we’ve done, all roads lead back to the streaming wars. So content and IP, what we’re seeing, is more valuable than ever before because of the exorbitant spends that we’re seeing in the streaming wars as consumption is shifting from traditional TV and film onto the streaming platforms. And so the major players: Netflix, Disney+, HBO Max, and now Discovery, all of them are spending more and more in the billions every year on content and marketing to increase customer acquisition, to reduce churn, and to maximize lifetime value, and to ultimately win the future of entertainment when it’s a streaming-first world. And in this world, content is more valuable than ever before. It’s content-exclusive IP. It drives user acquisition. It minimizes churn. And what we’ve seen is it’s new tentpole originals of things like Stranger Things that really boosts user acquisitions.

 

Andrew Cohen:

People come on to be part of the zeitgeist, watch these new shows. And then library content, so things like The Office, boost user retention. People stay there to watch these comfort food shows. And I think that that explains a lot of the acquisition and investment activity that we’re seeing. So things like Hello Sunshine and A24, I see as more of a bet on future output of new tentpole originals for user acquisition. Both of those studios do have a great library of content, but I think it’s more about taking a bet on best-in-class creators to continue to churn out the type of best-in-class content that’s going to bring people to the platform.

 

Andrew Cohen:

Then things like the MGM acquisition by Amazon, I think that that was really a big bet on library. They have classic IP like James Bond.

 

Chris Erwin:

Don’t forget Pink Panther.

 

Andrew Cohen:

Of course. The list goes on, I’m sure. Rocky. Roku, who recently did the same acquiring the Quibi library. So that’s going to be the type of stuff that keeps people on the platform, reduces churn, and maximizes user retention. So really, a catchphrase I hear a lot from people in that world is that as the streaming wars are going on, it’s these production companies that are the bullet makers, and that makes them more valuable than ever before in today’s [inaudible 00:04:18] .

 

Chris Erwin:

So a few things to break down there. I think a point about investing in production companies/studios, where you’re going to get a team that you believe is going to make a lot of high quality and differentiated content in the future that is going to help drive user acquisition through temporal content. And just even having a really great library, which drives retention, which is increasingly important as there’s more and more competition, right? Someone churns off, the ability to get them back becomes even more expensive, as now there’s HBO Max and there’s Peacock and all the niche streamers, et cetera. And I think that is something that is reflected in Netflix’s recent re-upping of their deal with Shondaland, right? So that was the first big talent landmark deal with the streamer. I think dating back to around 2016, 2017, that set off a big talent buying spree of Ryan Murphy with Netflix and a handful of others. But clearly it worked out for Netflix, right? The number one performing Netflix show is Bridgerton, which was done through the Shondaland partnership. And I think they’re betting that that’s going to happen again.

 

Andrew Cohen:

On a similar point, even the second-tier streamers like Paramount Plus. You just saw Viacom CBS just spent $900 million on a deal with the creators of South Park to turn out new seasons of the show and even new movies. So again, taking this bet on fresh content, beloved IP to drive acquisition and retention.

 

Chris Erwin:

The dynamics that we are talking about now is where we’re seeing that there is a very viable business model for this content. I think it’s worth noting that you look at a price tag that we’re seeing for what’s rumored for Spring Hill or 900 million for Hello Sunshine. And you’re like, how does this make any sense? On a standalone basis, do these companies make enough revenue and EBITDA that drives that independent valuation.

 

Chris Erwin:

But the point is the independent valuation is not what matters. It’s about the integrated value that is going to be created in the business model of a streamer. And I think back to my early days in the digital world where I started out in digital YouTube and MCN, so I was part of Big Frame, which is then sold to Awesomeness. But in that vintage of 2012, 2013, you saw incredible investment where I think it was Comcast and Time Warner Cable were investing in Maker Studios and Full Screen and Dreamworks Animation, but Awesomeness pretty early on in 2012, if I remember, 2013. And there was all this hope, which is like, okay, when you looked at the Comscore data of these MCNs, just the amount of digital traffic to them was incredible.

 

Chris Erwin:

And so the bet from these traditional cable or media businesses, is like, we don’t have the business model now to extract revenues, but we’re sure we’ll figure it out. With traffic and audience, revenue will come. But the reality is, that never actually really happened, and there was also massive changes in the platform algorithms in YouTube or in Facebook, which caused viewership to just tank overnight. A lot of things that were outside of the control. But today these dynamics, the business model is much more solid and the environment is much more stable, because these companies are going, like a Netflix or a Peacock’s, going direct to consumer. They’re not relying on a third party platform. So it actually makes sense. So I just thought that’s an interesting parallel, comparing my weirdo digital history.

 

Andrew Cohen:

Absolutely. I think the fact that you refer to 2013 as vintage, I think shows how fast this space is moving. And I think what you just said about the stable operating environment on the buy side for the platforms, I think is just as true on the sell side as well, comparing this premium OTT landscape to the wild wild west of early stage digital video. Because I think a lot of these bets on early stage YouTube traders, MCNs, where you catch lightning in a bottle, but then the algorithm shifts, trends shifts. I think right now, when you look at companies like an A24 or a Hello Sunshine ,who have been able to consistently produce the [inaudible 00:08:11] best-in-class movies, TV that people connect with. I think that that is a safer bet that someone like a Netflix or an Apple can bring them onto their platform and say, “Keep making that, but make it for us.” And that there’s consistency and reliability there that they’re going to continue to turn out the type of premium fair that brings people onto the platform.

 

Chris Erwin:

There’s also another trend that’s happening here in the buyer-verse that’s worth calling out. And that is the fact that really large private equity, blue-chip companies are getting involved in the content bidding wars. So specifically, right, we saw Apollo over the past few months, acquire Yahoo and AOL from Verizon for a few billion. And then Hello Sunshine, again, was acquired by a Blackstone-backed private equity vehicle. From my history in digital and entertainment, particularly over the past five to seven years, you wouldn’t see these big PE firms making these size bets in media, typically. But I think the tides have turned. And the reason is, I think these are going to be, short-term holds. The private equity owners are sophisticated. They don’t want a standalone basis that these companies are not going to drive meaningful revenue and cashflow.

 

Chris Erwin:

But like you said, the streamer war dynamics means that there’s going to be an aggressive buying race over the next two to three years. It’s not going away over the next six months. It’s going to increase. And if these firms can buy up a bunch of media assets, consolidate them, get them to a certain scale, and even potentially, who knows? Is the next Shondaland deal with Netflix? Will we start seeing equivalents of that with Apollo and Blackstone packaged into their new media portfolios? Potentially. And then they’re going to flip them for a good profit, I think, in the next 36 months. So I wasn’t seeing this coming, but it seems to make sense.

 

Andrew Cohen:

How do you think that the increasing stack presence plays into all this?

 

Chris Erwin:

Obviously Buzzfeed is going public in a spec and is using spec proceeds and other investment to roll up complex, as well. As these digitally native companies, again, are realizing increased scale through consolidation, then getting more investment through spec, maybe they’re upping their quality of programming. And they’re looking at really premium franchises, like say Hot Ones under Complex or Buzzfeed Tasty, and say, “How can we go even bigger and make this attractive to a Netflix or a Peacock or a Discovery and align with their Food Network programming?” Yeah. Maybe that also feeds the wars in the future. I don’t know. That’s my two cents.

 

Andrew Cohen:

Totally makes sense. So as we look at what you just said, that PE, they’re holding for this big buying spree to come as values are inflating for content and IP, I think makes you think of who these buyers are going to be. One thing that comes to mind is just the OTT platforms themselves. So, and we’re already seeing platforms spending tons of money on output deals. You mentioned Shondaland, Viacom, CBS. Would it make sense for them to follow the Disney model? Like what Disney did acquiring Pixar or Marvel, and acquiring studios outright to own the process from end to end, from development to distribution. And then I think beyond that, there’s a few other potential buyers in the market. Like consumer product brands. We saw Apple is one of the companies that are better being rumored to buy A24. Nike is one of the companies being rumored to buy SpringHill. So I think as we’re seeing media and commerce merge and content become this universal truth, I could definitely see a world where these studios serve real value to companies even outside of the streaming wars, as we know it.

 

Chris Erwin:

Well, I think of note, Andrew, that there’s just also not a lot of premium studio assets left, right? MGM was taken off the table, Legendary was taken off the table. I think Lionsgate is rumored. I think a question that I’m left with is like, what are these other assets that could be exciting for, say, new buyers for these CPG companies. Like a Nike, for example. So here’s a crazy thought. Thinking about the next big source of digitally-native IP that caters to these new, young fandoms that are going to become older and want to have loyalty with platforms over the years, might some of these streamers start dipping their toes in acquiring large metaverse creators or worlds? Is that something we might see? I think that’s top of mind because we’re doing some work that’s relevant in that space, but just a random thought that came to me.

 

Andrew Cohen:

Absolutely. I think eyeballs follow content and IP that they connect with. And right now, especially for younger audiences, a lot of that is being originated in the metaverse. So definitely wouldn’t be surprised to see that adapted by the main streaming platforms, I think even just, again, expanding the [inaudible 00:12:50] power defining the streaming wars, there’s also what we call the AVOD wars or the fast wars outside of subscription platforms like Netflix and HBO. You have the Roku’s, the Tubi’s of the world that amassing huge audiences at a really big footprint. But right now it’s still a really commodified space. And we’ve been seeing some moves into original content programming by them to differentiate them and their offerings in the marketplace, like the Quibi library acquisition that we mentioned earlier. But I could definitely see them moving more and more upstream to more premium tentpole originals. And to do that, I think acquiring a studio or production company would make a lot of sense.

 

Chris Erwin:

Yeah. I think the core business model for those AVOD and fast platforms is selling ad inventory across their third party content. But we know that the negotiation rights for selling that inventory, that is a constant battle with their partners, and who knows how the terms are going to change. And so where they have more control, is there more owned content hubs that they’re creating, which gives them not only more ad inventory, but also a differentiated user experience relative to their other fast peers, right?

 

Andrew Cohen:

With a bigger user base, bigger control of the market and audience size, you have more leverage with those ad partners. I think the most viable way to gain market share, and like I said, it’s kind of a commodified space, is by having differentiated premium content offering that can make Roku the go-to AVOD platform. And then once you own that audience, you could now have a lot more leverage in the ad market.

 

Chris Erwin:

We all know a lot of marketers are really frustrated by the fact that they are not able to participate in the SVOD environment. So we know marketers have been clamoring, Netflix say, like, “Let us in.” Also create an ad based model. Now we’re seeing that HBO max and peacock have ad-based support. But I think a lot of these marketers still want more premium content environments to advertise to consumers in. And I think the fast platforms are going to offer that for them as that demand goes up. I think that’s yet another reason why they’re going to start investing in more premium content, to get those ad dollars. But Andrew, I think that we are backing up against our time limit here. So unless there’s any final points, I think we’ve got to say, “Till next time.”

 

Andrew Cohen:

Next time. See you then.

 —

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