On Crackle Deal, Shares of Chicken Soup for the Soul Entertainment Jump 36%

Is it chicken soup for the AVOD soul that will create a category leader?

Chicken Soup for the Soul Entertainment, a relatively small entertainment and media company, is hoping to vault into one of the industry’s top ad-supported video-on-demand players through its deal to take control of Sony’s Crackle — the latest in its roll-up strategy.

As first reported by Variety, Sony Pictures Television reached a deal with CSS Entertainment to form a joint venture under which the latter will have majority ownership of Crackle (to be renamed Crackle Plus). CSS Entertainment expects the Crackle deal to close next month, or in May 2019 at the latest.

Investors are bullish on CSS Entertainment’s latest move: On Friday, the company’s stock, which is traded on Nasdaq, by 36.4%, to close at $12.36 per share.

“We now are in a position to create one of the few meaningful companies that will be in [the ad-supported VOD] space,” Bill Rouhana, CSS Entertainment chairman and CEO, said on a call with investors Friday.

CSS Entertainment expects the addition of Crackle to more than double overall revenue (it generated $27.8 million in 2018 sales) and will be a “meaningful” driver to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA). The Crackle contribution to EBITDA will be around 25% of total revenue, execs said.

“We’ve been working nonstop on this acquisition for months… This is transformative for us, for sure,” said Rouhana, who remains the company’s largest single shareholder.

It’s not clear how much appetite CSS Entertainment has for investing in original content in the new Crackle Plus, with Rouhana suggesting most of the content will be licensed. Originals on Crackle have included “The Oath” from executive producer 50 Cent, a series based on Guy Ritchie’s “Snatch,” and “SuperMansion,” a stop-motion animated series featuring Bryan Cranston.

CSS Entertainment is making no cash outlay in the Crackle deal; the value of its pact with Sony isn’t fully clear. Under the terms of the transaction, Sony will receive 4 million five-year warrants to purchase CSS Entertainment stock at various price points; Chicken Soup for the Soul Entertainment said it will release additional info on the transaction in future SEC filings.

Rouhana plans to run Crackle with a much lower overhead than SPT did, and will have access to certain Sony titles under the JV partnership. In its due diligence of Sony Crackle, the company found several areas where it can cut costs, according to Rouhana. “There was a lot of cost there,” he said. “We run our businesses differently.”

The AVOD landscape is highly fragmented, Rouhana said, and he noted that CSS Entertainment will continue to look at other potential acquisitions. “This is the time to be a buyer, not to be a builder spending big marketing money,” he told investors.

The Crackle deal builds on CSS Entertainment’s prior scoop-ups. In August 2018, the company bought Pivotshare, a subscription VOD service with channels across categories including music, sports, religion, arts and culture, lifestyle and family, in a $4.35 million deal. That came after CSS Entertainment’s November 2017 deal to acquire Screen Media, an indie film and TV show distributor which also operated free video-streaming service Popcornflix, valued at $5.5 million.

In 2016, Chicken Soup for the Soul entered into a deal with Ashton Kutcher to acquire majority control of A Plus, the actor’s “positive journalism” media startup — and then this past January, CSS Entertainment acquired the remaining stake in A Plus for $2.7 million. Last fall, it bought Truli Media, focused on Christian and “family friendly” content.

“At this point… we’ve demonstrated we know how to acquire media businesses and we know how to optimize them,” Rouhana said.

All told, with the addition of Sony Crackle, CSS Entertainment will have 10 million monthly active users and over 38,000 combined hours of programming (including access to Sony Pictures Television’s library assets). The company currently streams more than 1.3 billion minutes per month on more than 100 VOD networks, with content from over 90 partners.

For full-year 2018, CSS Entertainment reported revenue of $27.8 million, up 152% year over year, and it posted a net loss of $800,000. Adjusted EBITDA was $11.3 million, up 180%. With Crackle, VOD will become the majority of CSS Entertainment’s business.

Rouhana said in anticipation of the Crackle deal, CSS Entertainment opted to retain certain rights to two of its completed original series — “Hidden Heroes,” originally slated for CBS, and “Going From Broke,” a financial show about of millennials executive produced by Ashton Kutcher — to be able to premiere them on its own networks.

CSS Entertainment may also retain AVOD rights to Terry Gilliam’s ‘The Man Who Killed Don Quixote,” for which Screen Vision acquired the North American distribution rights. The company also acquired five-year AVOD rights to exhibit more than 500 films from the FilmRise library on its owned-and-operated networks.

Since its 2014 founding, CSS Entertainment has raised capital through a variety of mechanisms, including an IPO in 2017 under the SEC’s Reg A+ regulation that raised $30 million, a $7.5 million loan and $13.7 million through an unusual security called a “redeemable perpetual preferred stock offering.”

Rouhana in 2008 acquired Chicken Soup for the Soul LLC from the “Chicken Soup for the Soul” book series creators Mark Victor Hansen and Jack Canfield. Privately held Chicken Soup for the Soul LLC is the parent of the publicly traded CSS Entertainment division.

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