Chicken Soup To Acquire DVD Kiosk Merchant Redbox In $375 million Deal For Sagging SPAC
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Among buggy whip businesses, Redbox Entertainment (RDBX), the Oakbrook Terrace, Illinois operator of 38,000 DVD rental kiosks found in supermarkets and convenience stores from Safeway and ShopRite, to Walmart and Walgreens, has shown surprising staying power. While Blockbuster has become a distant memory and Netflix dominates digital movie streaming, Redbox, which derives more than nearly 90% of its revenues from customers that pay $1.99 per night to rent DVDs of popular movies and video games, was generating more than $850 million in revenues and $200 million in cash flow prior to the pandemic in 2019. Covid-19 killed theatrical movie releases—a key driver in kiosk movie rentals—and Redbox’s legacy business collapsed. In 2021 sales amounted to $289 million and cash flow went negative to the tune of $15 million.

To the rescue came a SPAC deal in 2021 with promises of $145 million in cash and PIPE commitments of $50 million. Unfortunately, disappointing financial results and a flood of redemptions caused Redbox’s post-SPAC merger shares to sink from $10 in October 2021 to under $2 recently.

Today Chicken Soup for the Soul Entertainment (CSSE), the Cos Cob, Connecticut based ad-supported video on demand (AVOD) streaming company that owns Crackle, announced that it will acquire Redbox for $375 million, comprised of $50 million in Chicken Soup stock and the assumption of $325 million in Redbox’s debt. The all stock transaction leaves Chicken Soup shareholders with 76.5% of the company and Redbox shareholders with 23.5%. Redbox’s majority owner, Apollo Global Management

APO
, which acquired the company as part of its purchase of Outerwall Inc. for $1.6 billion in 2016, will own approximately 15% of the Chicken Soup after the transaction is completed.

Chicken Soup for the Soul Entertainment is run by William Rouhana Jr., 69, a former telecom executive who presided over an acquisitive broadband company called WinStar during the dotcom boom in the 1990s. WinStar reached $4 billion in market capitalization before it filed for bankruptcy protection in April 2001. In 2008, Rouhana acquired inspirational paperback book publisher Chicken Soup for the Soul and has been on a mission to transform it into a full-fledged entertainment company catering to cord cutters with advertising supported streaming channels including Crackle and Popcorn Flix. Besides its eight ad-supported video on demand and television streaming channels, with 40 million monthly active users, Chicken Soup also produces and distributes films and television shows. It specializes in lower budget offerings such as Nicholas Cage’s Willy’s Wonderland and reality series like Ashton Kutscher’s Going From Broke. Last year Chicken Soup acquired Hollywood’s Sonar Entertainment, Indian film producer Locomotive Global and independent film and television distributor 1091 Pictures. It now has 24,000 episodes of tv and 14,500 films in its library, representing more than 100,000 hours of filmed entertainment.

In 2021, Chicken Soup for the Soul reported $110 million in revenues and cash flow of $22 million. Its shares and market capitalization have declined precipitously in recent months, falling more than 80% from their 2021 peak to a recent market cap of $115 million.

Why is Rouhana interested in DVD rental dinosaur Redbox?

“I’m buying the dinosaur because the dinosaur comes with cash flow and the dinosaur is gonna lay nice little dinosaur eggs called digital ad businesses with 40 million customers who already love the brand, with its TVOD (transactional video on demand) business and free TV business already in place,” says Rouhana referring to Redbox’s, loyalty program and its app, which now offers premium movies on demand as well as free live television channels ranging from Bloomberg TV and AccuWeather to TMZ. “We’re gonna create a very important platform in the entertainment business, where we reach consumers in probably the most ways of anybody. At the kiosk, in TVOD, in AVOD and in our loyalty program. I don’t think this is a dinosaur. I think this is the future.”

Rouhana says he has been eying Redbox for almost two years and believes that despite its declining DVD rental business, it’s ripe for a sharp turnaround, in part because movie production is back to pre-pandemic levels and theatrical movie releases are on the rise to the point where Wedbush Securities estimates that Redbox revenues will surpass $1 billion in 2023. Moreover, if inflation persists and leads to a recession, Redbox’s business will benefit as consumers become more cost conscious and cancel premium streamers like Apple TV+ and Disney+, in favor of free services, which require viewers to endure advertising or rent cheaper DVDs.

“If you are a consumer, you’ve got to figure out where to put your money and it’s not gonna be streaming video on demand, but it could include half price movies with the family on DVD,” says Rouhana. Even mighty Netflix, whose shares are down more than 70% since November, says it will introduce a lower priced, ad-supported tier. Netflix lost 200,000 subscribers in the first quarter and said it expects to lose another two million in the second quarter.

According to Rouhana, combining Chicken Soup with Redbox could add $40 million to the bottom line, most of which he says will come from cost cutting. It will also add significantly to Chicken Soup’s debt load, but Rouhana has structured the debt to be covenant-free for the first two years, with the option avoid cash interest payments for the first 18 months. He has also arranged for a new $80 million working capital credit line from New York City’s HPS Investment Partners, for five years. By early 2023, Chicken Soup expects the combined company will generate revenues exceeding $500 million and cash flow of no less than $100 million.

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