Among buggy whip companies, 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 revenue from customers who pay $1.99 per night to rent movie and game DVDs popular video, generated more than $850 million in revenue and $200 million in cash flow before the pandemic in 2019. Covid-19 has killed theatrical movie releases – a key driver of newsstand movie rentals – and the Redbox legacy business collapsed. In 2021, sales were $289 million and cash flow turned negative by $15 million.
To the rescue came a SPAC deal in 2021 with pledges of $145 million in cash and PIPE commitments of $50 million. Unfortunately, disappointing financial results and a flood of buybacks have seen Redbox’s post-SPAC merger shares plummet from $10 in October 2021 to less than $2 recently.
Today Chicken Soup for the Entertainment of the Soul (CSSE), the Cos Cob, Connecticut-based video-on-demand (AVOD) streaming company that owns Crackle, has announced it will acquire Redbox for $375 million, including $50 million in Chicken Soup stock and the take responsible for $325 million of Redbox debt. The all-stock deal leaves Chicken Soup shareholders 76.5% of the company and Redbox shareholders 23.5%. Majority owner of Redbox, Apollo Global Management
Chicken Soup for the Soul Entertainment is run by William Rouhana Jr., 69, a former telecommunications executive who chaired an acquired broadband company called WinStar during the dotcom boom of the 1990s. WinStar hit $4 billion market capitalization before filing for bankruptcy protection in April 2001. In 2008, Rouhana acquired inspirational paperback publisher Chicken Soup for the Soul and set out to turn it into an entertainment company fully fledged. cutters with ad-supported streaming channels including Crackle and Popcorn Flix. In addition to its eight ad-supported video-on-demand and streaming TV channels, with 40 million monthly active users, Chicken Soup also produces and distributes movies and TV shows. He specializes in low budget offerings such as Nicholas Cage’s Willy’s Wonderland and reality TV series like Ashton Kutscher Leaving 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 television episodes and 14,500 movies in its library, representing over 100,000 hours of filmed entertainment.
In 2021, Chicken Soup for the Soul brought in $110 million in revenue and cash flow of $22 million. Its shares and market cap have fallen 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 Redbox dinosaur DVD rental?
“I buy the dinosaur because the dinosaur comes with cash flow and the dinosaur is going to lay cute little dinosaur eggs called digital advertising companies with 40 million customers who already love the brand, with its TVOD business (video transactional on-demand) and free TV business already in place,” Rouhana says, referring to Redbox’s loyalty program and app, which now offers premium on-demand movies as well as free live TV channels. ranging from Bloomberg TV and AccuWeather to TMZ.” We will create a very important platform in the entertainment sector, where we reach consumers in the widest possible way. On newsstands, TVOD, AVOD and our loyalty program. I don’t think it’s a dinosaur. I think that’s the future.”
Rouhana says he’s been watching Redbox for almost two years and thinks that despite the dip in his DVD rental business, it’s ripe for a sharp turnaround, in part because movie production has returned to pre-Central levels. pandemic and that theatrical movie releases are on the rise. point at which Wedbush Securities estimates that Redbox’s revenues will exceed $1 billion in 2023. Additionally, if inflation persists and leads to a recession, Redbox’s business will benefit as consumers become more cost conscious and cancel bills. premium streamers like Apple TV+ and Disney+, in favor of free services, which force viewers to endure advertising or rent cheaper DVDs.
“If you’re a consumer, you need to know where to put your money and it won’t be delivering video-on-demand, but it could include half-price movies with the family on DVD,” Rouhana says. Even powerhouse Netflix, whose shares are down more than 70% since November, said it would 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 believes will come from cost cutting. It will also significantly increase Chicken Soup’s indebtedness, but Rouhana has structured the debt to be covenant-free for the first two years, with the option to avoid cash interest payments for the first 18 months. He also secured a new $80 million working capital line of credit from HPS Investment Partners of New York, for five years. By early 2023, Chicken Soup expects the combined company to generate revenues in excess of $500 million and cash flow of at least $100 million.