The year ahead may well amount to the worst of times and the best of times for private equity players with big investments in media and entertainment.
The sudden paralysis of business activity caused by the coronavirus lockdown has created unprecedented upheaval across the entertainment industry, which is usually resilient in the face of economic downturns. But the prohibitions on public gatherings have put so much of the business on ice, creating a perfect storm of bad consequences for organizations that loaded up on debt as part of private equity transactions.
Endeavor, AMC Theatres, iHeartMedia and Cirque du Soleil are among the long list of companies facing the one-two punch of high leverage and no clarity on when business will return to anything approaching normal operations. Moreover, it’s impossible to tell when audiences will be ready to go back en masse to sports arenas, movie theaters and concert halls given the public health threat posed by the COVID-19 pandemic.
“There are a lot of firms with land mines in their portfolios,” says a senior industry executive with experience in the PE world.
At the same time, PE outfits are always on the lookout for distressed assets that can be rehabilitated with new management or new capital or both. There may be ample shopping opportunities over the next 12 to 24 months as businesses begin to assess long-term prospects in the post-pandemic environment.
Financial research outfit Preqin estimated last year that the amount of private capital “dry powder” waiting to be deployed has reached $2.1 trillion, of which 62% was controlled by private equity firms and 34% by venture capital firms.
Kevin Kaiser, adjunct professor of finance at the University of Pennsylvania’s Wharton School, has long studied the activity of private equity firms. Although PE investors have a reputation for being ruthless with management and employees, such investors have every incentive to support their portfolio companies so long as they see cash-flow growth potential on the horizon or strong underlying value in the assets.
“If a company is having a temporary liquidity crisis for a few months, they’ll have no problem coming up with money to help get them through,” Kaiser says. “If they perceive that a company will consume more money than they’re going to get back, they won’t [help them]. And that’s to their credit, because so many [business] managers put good money after bad and don’t recognize losers.”
Silver Lake, TPG, Providence Equity, KKR and Apollo Global Management have been among the most active major PE players to spread investment money around entertainment and media.
Endeavor is majority owned by Silver Lake, which also has a stake in AMC Theatres after making a $600 million investment in the nation’s largest exhibition chain in 2018. AMC is widely expected to file for bankruptcy protection as it struggles through the indefinite closure of its 600-plus theaters in the U.S. and Canada.
Endeavor is under extreme pressure to restructure the $4.6 billion in debt that has piled up as the WME parent company went on an acquisition spree starting in 2012, fueled by an estimated $750 million in investment from Silver Lake. After Endeavor’s IPO failed to materialize in September, the big question became whether Silver Lake would step in again in some form to help ease the debt squeeze. That process has become more complicated amid the pandemic panic, and difficult projections for mixed martial arts promoter UFC, Professional Bull Riders and other businesses under the Endeavor umbrella.
To wit, Endeavor’s credit rating was downgraded on April 13 from B to CCC Plus status by S&P Global Ratings, meaning that debt refinancing efforts will be more costly with a credit rating that is near junk-bond territory.
“The negative outlook on Endeavor reflects a high level of uncertainty surrounding event- and entertainment-based revenue streams due to the spread of the coronavirus, resulting in significantly heightened financial risk over at least the next several quarters,” S&P Global stated in issuing the downgrade. “We believe the level of financial risk could motivate the company to seek a distressed debt restructuring if coronavirus containment does not occur by midyear so that revenue can begin to recover.”
TPG acquired a majority stake in Cirque du Soleil in a $1.5 billion deal that involved other investors in 2015. The renowned performing arts group laid off 95% of its more than 4,600 employees last month. Cirque du Soleil and TPG are in the midst of working on a restructuring plan for its $900 million in debt, according to Reuters.
TPG, which owns a large stake in CAA, also is facing stress in its investments in STX Entertainment and Vice Media. Both were grappling capital needs that were evident before the pandemic disruption. The temporary halt in moviegoing and the plummet in advertising expenditures is only going to exacerbate those problems.
Debt refinancing deals, asset sales and Chapter 11 bankruptcies are sure to be byproducts of the pandemic disruption for businesses in every sector of the economy. The federal government gave a nod to the growing influence of private equity-controlled companies with its recent moves to inject more money into the high-yield debt markets that will be vital to helping companies survive the current turbulence. That was an “extraordinary measure” that indicated the gravity of the situation, says Wharton School’s Kaiser.
The short-term pain of restructurings and business failures will give way to a healthier economy overall, as only the strong will survive the wallop of the coronavirus and the recession that will ensue. Media has been a prime target for private equity investment because it’s an industry in the throes of transition and ripe for innovation. Exhibit A: Netflix.
“Private equity sees failure at the management level as an opportunity,” Kaiser says. “They’ll be hesitant to bet right now, but as soon as we’re able to reduce [COVID-19] uncertainty enough with analytics, they’ll definitely be buying, at low interest rates.”