Lots of industry executives’ heads snapped to attention around 10:30am Eastern Time on Tuesday when the Wall Street Journal posted exclusively that Reese Witherspoon’s media company Hello Sunshine was being majority acquired for $900 million by a new company being formed by former Disney executives Kevin Mayer and Tom Staggs, which itself is being backed by the private equity behemoth Blackstone Group.
Mine was one of those heads snapping, for a variety of reasons. Foremost, $900 million is a whole lot of money for what on the surface seems like *basically* a production company, not to mention one that was only just started 4 1/2 years ago, which therefore means it doesn’t have a deep, monetizable library (which is what justified the recent Amazon-MGM deal). True, Ms. Witherspoon is one of the savviest players in the industry, and her Hello Sunshine business partner and company CEO Sarah Harden has strong industry experience and is also a Harvard Business School Baker Scholar (as an HBS grad myself, but far from a Baker Scholar, which is the top 5% of your 800-person class, I can personally attest that achieving that ranking puts you in the ultimate elite).
Still….$900 million? Yes, $900 million. I don’t have any insider info, but it wouldn’t surprise me if the company generates $50-$100 million of revenue in 2021, max. So the valuation is likely in the 9-18x revenue range…who knows it could even be more. That’s a rare tech industry valuation these days (for context, Roku's mighty stock has bounced around 12x revenue recently).
The WSJ reported $500 million of the $900 million will go to cash out existing investors and the balance will be retained by Ms. Witherspoon, Ms. Harden and other company executives, to be rolled over into the new company. That’s a huge tell about how big they think the resulting company can ultimately be worth and what the IPO or SPAC will look like. But that’s just part of the story….here are my 5 takeaways:
1. Savvy investors see an opportunity in premium quality content.
All the parties on all sides of this deal are very savvy and privy to deep insights about critical industry trends. They clearly see an opportunity for premium quality content. Despite the tens of billions of dollars per year being invested by Netflix, Amazon, Disney+, etc. in content, the parties believe there are unmet audience needs, and Hello Sunshine is going to fill them.
Indeed, Hello Sunshine is already getting its slice of those SVOD billions through licensing its shows like “Big Little Lies,” “The Morning Show” and “Little Fires Everywhere.” Sometimes it has co-owned the rights, sometimes it hasn’t. The WSJ reports it will maintain an ownership in all going forward. The vision here is that the parties believe Hello Sunshine can get a BIGGER slice by producing better/more appealing shows.
Now what that means is all in the eye of the beholder. But if you look at IMDb ratings for a lot of Netflix’s and Amazon shows over the past few years, for example, you’ll see a lot of sub-8 ratings (hat tip to old industry friend for bringing that eye-opener to my attention a few weeks ago). That’s not very impressive given the billions that have been spent and the talent involved (for the record, “Big Little Lies” gets 8.5, “The Morning Show” gets 8.4 and “Little Fires Everywhere” gets 7.7).
Clearly Ms. Witherspoon and the others believe that the world’s best creative talent can average above an 8 consistently with Hello Sunshine’s encouragement - and that audiences will respond accordingly. I agree. It’s a sub-plot to my post from a few weeks ago, “5 Reasons Going to the Movies is Facing an Irreversible Demise.”
2. Direct relationships and first-party data are critical.
A key Hello Sunshine differentiator - indeed, THE Hello Sunshine differentiator - is “Reese’s Book Club,” a clever next-gen book club app that combines recommendations, community, events and perks - all with Hello Sunshine’s female/diversity focus. RBC makes money from memberships, commissions, etc. But RBC’s biggest value is that it gives Hello Sunshine direct relationships with over 2.5 million members’ (reportedly) and access to all their data. That’s a huge edge in helping inform what TV/movie projects Hello Sunshine should pursue and how much it should pay. Eventually it will also be hugely valuable when Hello Sunshine sells CTV ads on its future ad-supported properties.
This matters a lot because SVOD providers have shared virtually no information, even about basic viewership, with creators or the public. Ratings in the SVOD world have become a black box. And that’s given the SVOD providers a huge asymmetric advantage when negotiating with talent, which no doubt have been grinding their teeth over this for years, despite the fat paychecks they’ve been receiving. After fighting so hard for the “back-end,” Netflix and others effectively demolished it. Now Hello Sunshine is going to re-write the script. It will come to the bargaining table on an equal footing. That means it will get better deals, which it can in turn use to make bigger/more bets on projects it has higher confidence in. And in turn pry some of the power away from Netflix, Amazon and others.
If you’re top-tier talent, Ms. Witherspoon just sent you a memo: figure out how to have your own scaled direct relationships and a professional data science operation. If you don’t, then just take your seat in the back of the car right now, because that’s where you’re permanently going to be sitting. Others will be driving.
3. The platforming of content is here.
Related to the above, the parties tipped their hand to their intention to use Hello Sunshine as a platform to acquire other celebrity-driven media properties. That’s really smart. There are very few celebrities that are savvy AND willing to take time as Ms. Witherspoon has to understand how all the gears need to work together in order for the business to thrive…after all, it’s a whole lot more fun to hang out on a 250 foot yacht in the Mediterranean than in a conference room with the data analytics team. And to be fair, Ms. Witherspoon has a world-class business partner in Ms. Harden, who herself learned from the world-class Peter Chernin.
Now the parties are going to leverage all that world-classness (is that a word?) to optimize the value of other celebrities’ properties, under the Hello Sunshine umbrella. Variety reported LeBron James and Maverick Carter as being names/companies in the mix. There are no shortage of opportunities, especially if you have Blackstone’s infinitely deep pockets behind you. Credit to Ms. Witherspoon; while Scarlett Johansson is channeling her inner Marie Antoinette in suing Disney for every scrap of “Black Widow” revenue she can get her hands on, because, in essence, she believes she alone should be impervious to the financial fallout of Covid, Ms. Witherspoon has a growth mindset. She and her new partners recognize the tectonic plates are shifting and are building out their value proposition accordingly. Underneath all her over-achieving, Tracy Flick was pretty damn smart.
4. Business models are changing, fast.
In their interviews about the deal, the parties made very clear their excitement about the multiple revenues Hello Sunshine is already pursuing, and going to build out. They scrupulously avoided calling Hello Sunshine a “studio” because that would be both limiting and old-school. They have far bigger ambitions. Hello Sunshine is going to capitalize on every major trend impacting the entertainment business: connected TV, ad-supported/hybrid business models, podcasts, social media, gaming, live, music, merchandise, etc., etc. No stone will be left unturned. They’re going to build franchises and global brands. Hello Sunshine is aiming to be Disney for the digital age. That’s really exciting, and ultimately when the company goes public via an IPO or SPAC, its valuation will make the $900 million look cheap.
5. Whoa, coincidence that YouTube popped up its head within about 24 hours of the Hello Sunshine deal being announced?
Meanwhile, something kind of unusual happened within 24 hours of the Hello Sunshine news. First, The Verge published an interview with YouTube's CPO Neal Mohan. Then YouTube’s Chief Business Officer Robert Kyncl posted “10 ways to monetize YouTube.” It contained no new news, just a recap of all the ways we all know YouTube helps creators make money.
And the post had just one pull quote: “In just over the last three years, we’ve paid more than $30 billion to creators, artists and media companies.” That’s terrific and YouTube’s creators are grateful (or they should be; though actually they’ll still just grouse it’s not enough). But the $30 billion number was originally reported back in January, 2021. Hey YouTube comm team: at least give us a newly updated number for first half of 2021 that will get relentlessly bounced around the Internet!
So what’s going on here? Purely coincidental timing that YouTube popped up its head to send a little love letter to the creative community just now? Was the $7 billion in ad revenue it notched in Q2 ’21 not sufficient as further evidence that there is, and only ever will be, one YouTube? I’m not really sure what’s going on here, but the timing is interesting.
But takeaway #5 is a digression. The focus here should be on the Hello Sunshine deal and its implications. Given how PE firms travel and think in packs, it’s hard to believe this will be the last big PE deal to be done with an independent “studio.” But who else is there with over 2.5 million direct relationships, headed by an A-list celebrity, with a world-class CEO running the business, with a built out team of data scientists, etc. and several high-quality shows already under its belt? I’d love to hear your ideas.
And if you can’t think of any good ideas, then that $900 million Blackstone just spent is looking like a better and better deal already.
Categories: Deals & Financings
Topics: Hello Sunshine