Reality TV Goes Bust
Goldman Sachs is working with John de Mol, billionaire founder of reality-television producer Endemol, on a massive financial restructuring proposal designed to rescue the company whose global hits include Big Brother, Fear Factor, and Deal or No Deal, sources with knowledge of the situation told The Daily Beast.
These sources say a number of factors have conspired to precipitate the move, and none of them bode well for the future of American reality television: Endemol, which has roughly $3 billion in outstanding debt, has gone on a three-year, $300 million-plus acquisition spree that has strained the company’s liquidity at the same time that it's failed to develop new hits and when broadcast networks have begun eschewing the genre, leaving mostly niche cable channels to prop up the field.
“If I owned a piece of a company and, in a separate capacity, loaned money to that company, am I going to let it go into bankruptcy?”
Rumors have persisted around Hollywood for months that Endemol—which counts among its production credits Big Brother, Deal or No Deal, and Extreme Makeover: Home Edition—is teetering on the brink of insolvency. That’s not true—yet. But while Endemol isn’t choking under its debt the way companies like Spanish-language broadcaster Univision Communications, record label EMI Group, or movie studio Metro-Goldwyn-Mayer are, some sources tell me that de Mol and Goldman have to move quickly to do a deal with debtholders, or else Endemol may indeed face a cash crunch.
“Are the company’s liabilities in excess of its fair market value? I’d say yeah,” says a second source familiar with Endemol. “Barring a dramatic turnaround in its operating performance, the day of reckoning will come.”
We’ve come a long way from 2007, when Goldman, de Mol, and, Italy’s Mediaset purchased Endemol in a leveraged buyout valued at roughly $4 billion. The parties put up a little more than $1 billion of equity in the deal and financed the rest with debt supplied by Barclays Capital, Credit Suisse, ABN Amro, and Goldman itself.
According to a source with knowledge of Endemol’s inner workings, Mediaset hasn’t been an involved investor and would likely be amenable to cashing out its position at the right price. By contrast, de Mol is “an ambitious, entrepreneurial person who is game to keep this thing going.” And Goldman, well, the bank really has no choice but to work something out that will keep Endemol operating as a going concern. Indeed, the investment bank finds itself in the conflict-riddled position of being an owner of Endemol, a major holder of its debt, and an adviser to the company.
“If I owned a piece of a company and, in a separate capacity, loaned money to that company, am I going to let it go into bankruptcy,” the third source asked rhetorically.
A representative for Goldman Sachs declined comment.
To pull off the restructuring, however, de Mol and Goldman need to convince the other holders of Endemol’s debt to sell. But that won’t be an easy task, as the very reason de Mol and Goldman are aiming to buy up Endemol’s debt—because it is currently trading at a discount—is in conflict with the debtholders’ goal of getting a premium over what they originally paid.
“The hedge funds and banks that hold Endemol’s debt aren’t going to sell it cheaply,” notes the second source.
• Anna David: Reality TV Invades CampusMoreover, Endemol already raised the ire of a trio of hedge funds—Centerbridge Partners, Sankaty Advisors, and GoldenTree—earlier this year when it began buying back debt at a discount and recording the savings as profit on its books. The hedge funds, who together own 20 percent of Endemol’s debt, said the practice amounted to financial engineering that obscured the company’s actual profits and threatened a lawsuit if it wasn’t stopped. Endemol agreed to a sort of compromise, saying that it would continue to seek to buy back stock but that it would no longer count the savings as profit, a move that doesn’t preclude the current restructuring path it is pursuing.
Calls to Centerbridge and GoldenTree were not returned. A representative for Sankaty declined comment.
Compounding Endemol’s debt issues is the fact that shortly after its 2007 purchase CEO Ynon Kriez went on a epic buying spree intended to expand the company’s reach internationally and diversify its programming portfolio into genres such as comedy and feature films. In the last three years, Kriez has spent more than $300 million acquiring companies such as Original Media, whose shows include BBQ Pitmasters, Storm Chasers, LA Ink, and feature films such as The Squid and the Whale, and 51 Minds, the production house behind Flavor of Love and Rock of Love. More recent purchases include Australia-based Southern Star, British companies Tiger Aspect and Darlow Smithson, and last week’s deal for Authentic Entertainment, which is responsible for Bravo’s Flipping Out and Food Network’s Ace of Cakes.
While an Endemol representative declined to comment on any restructuring proposals the company might be pursuing, he did point to these purchases as evidence that Endemol was on solid financial footing.
“Given our current outlook and taking into account the resources already available to the company and its shareholders, we strongly expect to continue to fully comply with our debt covenants for the foreseeable future,” the representative said by way of a statement. “We have a strong liquidity position which has allowed us to buy back debt as well as make significant acquisitions.”
As sources caution, however, the problem for Endemol isn’t now, but rather on the horizon, particularly if the current trends in the buying of alternative television shows continue. Endemol made its name on the back of a small number of huge hits like Are You Smarter Than a Fifth Grader? and Fear Factor, shows with generic formats that can be sold around the world. Notwithstanding ABC’s decision to renew Endemol’s Wipeout for a fourth season, reality programming has shifted away from broadcast networks like NBC and Fox and moved into the forefront for cable channels such as Bravo and History Channel. As such, reality producers across the board are seeing less upfront money for their shows because cable network budgets simply aren’t as big as those of their broadcast counterparts. And for Endemol in particular, the shift is even more painful because it doesn’t do niche programming particularly well. Put another way, while Wipeout works on ABC, it doesn’t make much sense on VH1.
“Endemol is like the Macy’s of reality television and what networks want right now are boutique shops like American Apparel,” says an Endemol competitor.
Goldman and de Mol are savvy enough to recognize the trend lines and understand that the niche networks are going to be the ones doing most of the reality-show buying over the next few years. Their play to consolidate control is basically a hedge against this development: In the best-case scenario, Endemol develops a few shows but receives less upfront money, which in turn crunches margins and makes it difficult to make interest payments. In the worst-case scenario, Endemol ceases to bring in enough revenue to meet its debt obligations, forcing it to breach loan mandates and become insolvent, thereby taking control out of their hands and placing it with a bankruptcy court.
Though that is something de Mol and Goldman don’t want to contemplate, they are counting on the fear of that future prospect to spook outside debtholders enough to sell out their positions. Essentially, the pitch they are making is that while they are in it for the long haul, it’s probably best for you other guys to get out now—and preferably at a discount or face value to the price of your debt, but certainly not at a premium.
Peter Lauria is senior correspondent covering business, media, and entertainment for The Daily Beast. He previously covered music, movies, television, cable, radio, and corporate media as a business reporter for The New York Post. His work has also appeared in Avenue, Blender, and Media Magazine, and he's appeared on CNBC, Bloomberg, BBC Radio, and Reuters TV.