The file quantity of Money studios have stashed away for a wet day may not be sufficient to fortify its steadiness sheet — and studio jobs — from the recession
Here’s why Hollywood screenwriters, actors, executives and artisans ought to care: Their jobs may totally rely upon how a lot studios can stash beneath the mattress. This additional money could be deployed by means of dividends to maintain buyers blissful, buttress steadiness sheets to forestall layoffs and supply a powder keg to scoop up corporations weakened by an financial downturn.
That’s the excellent news. The unhealthy information is that irrespective of how a lot CEOs bragged through the second-quarter earnings cycle in regards to the quantity of Money they’ve saved up, it received’t make a lot of a distinction if a recession is extended and deep.
“The studios and their investors should be thankful that they have cash, because it’s better than not having it, but it doesn’t assure you’re not going to go through a lot of pain,” mentioned Hal Vogel, a veteran leisure trade analyst who authored the e-book, “Financial Market Bubbles and Crashes.”
“But, is it a soft or hard landing?” he added. “I don’t know, maybe they’re just buzzing the control tower.”
Disney’s Bob Chapek lastly caught a break on Wednesday proclaiming that its money available hit $13 billion throughout its fiscal third quarter, by far the trade’s greatest quantity. Earlier that day, Lachlan Murdoch boasted that Fox’s $5.2 billion “continues to stand apart in a crowded Media ecosystem delivering a consistent operating performance and a robust free cash flow profile alongside an enviable balance sheet.”
Last week, Warner Bros. Discovery reported $4 billion in money that CEO David Zaslav mentioned can be boosted as a result of the mixture of the 2 Media giants will rating “significant free cash flow generation and Growth.” The firm logged about $4 billion in money spent as a part of Discovery’s acquisition of the enduring studio from AT&T.
Paramount CEO Bob Bakish mentioned the studio will “continue to maintain significant financial flexibility” with $4 billion in money and a $3.5 billion untouched credit score line. Lionsgate CEO Jon Feltheimer — whose firm is taken into account each a takeover goal and acquirer — identified the corporate has about $380 million of free money and “significant liquidity” with a $1.25 billion untouched credit score line.
To ensure, Hollywood is nowhere close to the degrees that America’s huge tech corporations are squatting on.
Apple alone has about $206 billion in its mad Money stash. In reality, there are 13 tech corporations which can be sitting on simply over $1 trillion of money saved up — bulldozing over the opposite $2 trillion anticipated from the remainder of the Standard & Poor’s 500 elements, in accordance to the index’s chief analyst Howard Silverblatt. (He mentioned in February, S&P 500 corporations now have sufficient money to give $8,131 to each man, girl and baby within the U.S.)
That liquidity issues for consumer-facing corporations that financial institution on every part from field workplace and theme park tickets, to merchandise gross sales and streaming subscriptions. This is what helps prop up their companies on the menace that advertisers will rein in spending as a result of customers are tightening their belts as inflation notches increased.
“Consumer discretionary spending saw tough conditions in the second quarter. This is a trend I expect to continue for at least a few quarters given the dismal state of the consumer despite a still strong jobs market,” mentioned Bret Jensen, chief funding strategist for Miami-based hedge fund Simplified Asset Management. “The personal savings rate is down to levels unseen since the financial crisis and credit card debt has seen a big rise recently. This tells me the consumer is largely tapped out.”
So, utilizing that money for dividends (and even inventory buybacks) are a method to no less than maintain buyers from not promoting. Stock buybacks have by no means been an excellent possibility, mentioned veteran analyst Vogel, since they have a tendency to purchase on the high of the market when all people is bullish. For occasion, Netflix introduced in April 2021, a $5 billion inventory buyback when shares had been buying and selling at about $550 a share, and it since dipped to a low of $162).
But there’s an M&A ace up their sleeve.
What if the financial system exhibits indicators of gentle weakening, and Hollywood studios are sitting upon mountains of money with no possible way to make investments it? This received’t be useless Money. There received’t be transformative offers like Discovery’s $43 billion acquisition of Warner Bros. or Disney’s $71.3 billion acquisition of Fox’s movie unit, however there are spot offers to snatch mental property, administration groups and holes that want to be stuffed.
But the large studio machines may have some competitors. Hedge funds, enterprise capital corporations, vulture syndicates and personal fairness gamers are all on the hunt.
“It’s not just the studios that have Money, it’s private equity and strong management teams with successful existing businesses that see opportunities,” mentioned Matt Rosenberg, a managing director and head of Media finance for asset supervisor Monroe Capital, a middle-market lender that’s making a brand new push into Hollywood offers. “Investors are always seeking opportunities for mismanaged or distressed companies where they can extract value from. The pandemic may have created conditions ripe for deals.”
Big personal fairness corporations like Apollo and Blackstone Group have been investing closely in Hollywood manufacturing corporations, particularly as main streaming providers are in a content material arms race to outdo the opposite. By all accounts, an estimated $50 billion to $100 billion a 12 months is being spent on creating content material that lures new streaming subscribers. And, whereas the massive leisure corporations are centered on their platforms, huge funding corporations try to money in.
For occasion, Apollo earlier this 12 months purchased a $760 million stake in Chinese-owned (and former Thomas Tull-run) film studio Legendary Entertainment that was behind movies like “Godzilla” and “Dune.” Peter Chernin’s manufacturing firm, The North Road Co., is being financed by $500 million from Providence Equity Partners and $300 million in debt from Apollo to get smaller offers executed. Candle Media, run by former Disney execs Tom Staggs and Kevin Mayer, has a multibillion-dollar battle chest from Blackstone.
“The possibility to scoop these kind of companies up at a reasonable price is viable, and sometimes a good use of cash as long as it’s not a huge transaction that transforms the structure of the company,” mentioned Vogel. “The tires have been kicked often on Lionsgate, and I have trouble with that valuation, but let’s see what’s next and where we go.”