Blackstone’s Billion-Dollar Bet on Reese Witherspoon Falls Short

Blackstone Inc. has given former Walt Disney Co. executives Kevin Mayer and Tom Staggs more than $1 billion to build the next great entertainment company. That investment has been put to the test this year.

(Bloomberg) — Blackstone Inc. has given former Walt Disney Co. executives Kevin Mayer and Tom Staggs more than $1 billion to build the next great entertainment company. That investment has been put to the test this year.

Earnings at Candle Media, which Mayer and Staggs started in 2021, are expected to come in about 50% below what the companies they acquired had forecast for 2023, according to people familiar with the matter. 

The shortfall stems from Candle’s two biggest properties: actor Reese Witherspoon’s Hello Sunshine and Moonbug Entertainment, owner of the YouTube kids entertainment sensation Cocomelon, according to the people, who asked not to be identified discussing private information. Staggs and Mayer blamed the shortfall on an “unprecedented” set of obstacles, including a decline in advertising at YouTube, two Hollywood strikes and a pullback in spending across the entertainment industry.

“It was a disappointing year for sure,” Mayer said in an interview. “But we like our position.” The company is profitable, he added, and grew this year despite the challenges. 

Mayer and Staggs, who worked together at Disney, created Candle as an independent producer of TV shows and movies for global streaming services. With money from Blackstone and borrowing, they spent as much as $4 billion buying companies that specialized in programming for adults, kids and viewers outside the US, along with short-form content for social media.

Candle executed many of its deals at the peak of the market for production companies, when low interest rates and optimism about streaming TV’s growth attracted billions of dollars from investors. 

But the market crashed over the past 18 months as Hollywood’s biggest studios cut back on spending to reduce their losses from streaming and reassure investors.

As a result, Candle’s profit this year is expected to come in at around $140 million to $170 million, according to the people. That’s below an earlier estimate of $330 million and also less than a more conservative forecast from management and Blackstone. Hello Sunshine is expected to deliver just 10% of projected earnings, while Moonbug is off about 30%.

“Candle is a highly profitable, high-quality business with world-class talent and creative output that has had significant organic growth since our investments,” a spokesperson for Blackstone said in a statement. “As with virtually everyone else in this industry there has been an impact from once-in-a-generation strikes and the broader economic environment.”

The situation has left Candle with a dilemma — what to do with the assets they’ve acquired. Of a half-dozen deals, only Moonbug generates a meaningful profit, and Candle needs that cash to service more than $1 billion in debt.

Mayer and Staggs, meanwhile, are also back at Disney part time. They’re serving as consultants to help their former boss, Chief Executive Officer Bob Iger, find a potential strategic investor for ESPN.

The two leaders said they remain confident in Candle’s investments and that the downturn is temporary. Moonbug and Hello Sunshine are growing, valuable assets and are attractive production partners for companies like Netflix Inc., Apple Inc. and Inc. 

Both men had reason to believe they’d be running Disney one day. Staggs, a 26-year company veteran, was named chief operating officer in 2015, only to leave a year later when it became clear Iger wasn’t giving up the reins any time soon. Mayer was with Disney for over 20 years and served as a key lieutenant to Iger on the acquisitions of Marvel and Lucasfilm, as well as the rollout of the Disney+ streaming service.

Since leaving Disney, both have taken a number of jobs. Mayer was briefly the CEO of TikTok and the chairman of the sports streaming service DAZN. He also advised Warner Bros. Discovery Inc. on its big merger.

Mayer, 61, and Staggs, 62, joined forces to make deals. They backed two special purpose acquisition companies looking for businesses to take public. One merged with the fitness company Beachbody Co. It’s down 98%, trading at 34 cents. The other terminated a planned acquisition of Hyperloop Transportation Technologies in February.

Blackstone approached Mayer and Staggs in late 2020 seeking advice. The company, which manages about $1 trillion in assets, wanted to make investments in media and entertainment, and turned to two of the industry’s most respected executives.

Streaming services like Netflix were supplanting cable networks, spending billions of dollars on programming from independent production companies. The rise of streaming in music was boosting the value of catalogs to record heights.

Enthusiasm about the streaming boom led to a frothy deal market for production companies. NBA star LeBron James’ SpringHill Co. raised money at a valuation of more than $700 million, while the Korean entertainment giant CJ ENM Co. bought an 80% stake in Killing Eve producer Endeavor Content, valuing the company at $800 million.

Blackstone made two big bets. It teamed with music impresario Merck Mercuriadis on a $1 billion fund to buy music catalogs. And it tapped Mayer and Staggs to shop for film and TV companies.

In August 2021, they bought a controlling stake in Witherspoon’s Hello Sunshine, which produces The Morning Show and Little Fires Everywhere, in a deal that valued the business at $900 million. 

Witherspoon is a huge star and a successful producer who assembled a skilled executive team. Sunshine has made hit shows and is building other lines of business, like a book club. But even in an up market, the price was staggering for a company that owned very little.

With one deal under their belts, Mayer and Staggs went on a shopping spree. They acquired Exile Content, a Latin media company, Faraway Road Productions, the producer of the Israeli drama Fauda, and ATTN, a digital media company. They spent $60 million for about 10% of Will and Jada Pinkett Smith’s company, just before the actor’s outburst at the Oscars got him banned from the ceremony for ten years. Their biggest deal was for Moonbug, home to Cocomelon, one of the most popular shows on YouTube and Netflix. Candle paid about $3 billion for Moonbug, outbidding Comcast Corp. and the private equity firm KKR & Co.

Some of these deals have worked out. Faraway Road and Exile cost very little and were done to bring their founders into the business. ATTN has beaten internal forecasts. But other have faltered. Candle paid about $10 million for a company selling nonfungible tokens that shut down about six months later.

“We did not overpay for Hello Sunshine,” Mayer said at a conference in Singapore in late 2022, predicting the deal “will be a big winner.” 

Since that frenzy, Wall Street has begun to fall out of love with streaming. Rising interest rates and fear of a recession have adjusted investors’ priorities, with many now wanting to see profits from the streaming businesses. 

The future of Candle depends on its two biggest purchases, Moonbug and Hello Sunshine.

While Moonbug hasn’t hit its numbers, it’s growing quickly. The company is likely to generate about $150 million in profit this year. It owns most of its intellectual property, including Cocomelon, a singing show for preschoolers which remains one of the most valuable children’s properties. It’s planning to expand abroad and into video games.

Hello Sunshine is more of a quandary. The company doesn’t own most of its shows. It produces them for third parties and accepts fees, as well as some profit participation.

When Candle bought Hello Sunshine, Witherspoon’s management projected the business would make more than $80 million in profit this year. Instead, it’s on track for less than $10 million, meaning some of the principals won’t be getting the earnouts they once expected.

Almost everyone involved has Candle stock, relying on Mayer and Staggs to figure out the next big deal, whether it’s an initial public offering or a sale. 

But first, according to executives who work for Mayer and Staggs, they need to figure out what they want Candle to be. Their initial vision was for a media company that did a little bit of everything — programs for adults and kids, shows for Netflix and social media, NFTs too. That more sense when interest rates were low, borrowing was easy and Hollywood was spending like mad. 

The two have time to figure it out. They said they’re staying the course, and still shopping for deals with Blackstone.

“We are poised for sustainable growth next year and beyond,” Staggs said in the interview. “Everyone has to sharpen their focus and sharpen their pencils.”

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