How Will Eko’s Litigation Against Quibi Result in Hedge Fund ROI?

May 5, 2020 by  Chris Erwin

Quibi has attracted many naysayers. Now it has an activist hedge fund investor mobilizing against it.

Elliott Management, run by Paul Singer, recently invested in rival interactive video company Eko to fund its litigation against the ‘Quick Bites’ streamer. You may remember Elliott from its recent activist actions against Twitter and AT&T.

Many will use this moment to pile on about Quibi’s demise (recent executive departures, regrets about launching during COVID-19 when on-the-go customer behavior is legally forbidden, lack of connected TV apps, lackluster sign ups after the first few weeks, competitor growth numbers, and more).

Instead, we’re most curious about Elliott’s ROI strategy. Some thoughts:

  • How much was the Eko investment, and what’s the end game? Elliott only makes major moves (it has $40B assets under management).

  • Will Quibi’s deep investor and founder pockets ($1.75B raised to date) enable Eko, with Elliott’s backing, a quick settlement? How big must the settlement be to matter?

  • How does Elliott participate in the settlement per its investment terms? Have the Eko shareholders approved the deal yet? Last we heard was no.

  • Does Elliott believe there’s strong investment ROI in the interactive and streaming video market, i.e. financial value beyond just tactical litigation? Hedge fund investors are savvy and often find multiple paths to value creation, while also managing their downside risk…does Elliott want to have a horse to bet on in OTT video? We’d be shocked by a hedge fund bet in upstart media streaming, so we at RockWater expect another angle…

  • To that end, is this a way for Eko to cheaply acquire Quibi, including all of its content catalog, and then position Eko for a sale to one of the larger streamers? In our 2020 predictions January blog post we noted:

“…Quibi will not have enough mobile-optimized library content for user retention over the next couple years, and will have incredibly high churn. Slower than expected sign ups and lack of customer stickyness will scare off follow-on investment, and Quibi’s death spiral will commence. But alas, disaster will be avoided when Katzenberg, the ultimate Hollywood salesman, finds an international buyer for Qubi’s team / tech / partnerships / JK affiliation. As a result, Quibi’s studio investors (a long list including Disney, WarnerMedia, Liberty Global, MGM, Fox, more) will fully recoup their invested capital via a mix of XX cents on the dollar sale proceeds and new output deals with the new acquirer (financial investors, who we believe are writing the biggest checks and who fortunately don’t sell content, won’t fare as well).”

Perhaps Elliott Management has done a separate valuation of the Quibi content catalog and believes it can gain control of the company and then auction off its IP portfolio? Perhaps the hedge fund perceives that content pricing will continue to skyrocket as (1) streaming wars competition ramps and (2) COVID-19 drives more at home watch time and challenges in content production (i.e. lower supply) for the foreseeable future.

Overall, what does Paul Singer see (or think he does) that we don’t?

We at RockWater are curious to observe how Katzenberg responds, and have no doubt that he will rally an interesting defense…or financial opportunity. The Hollywood mogul is incredibly adept at timing the market and orchestrating a sale for outsized returns (e.g. $3.8B sale of DreamWorks Animation to NBCU, and the $650M valuation of AwesomenessTV when Verizon invested in 2016).

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