Private equity’s movie studio cuts back for a changed reality

Candle’s belt-tightening reflects the dual blows of last year’s Hollywood strikes, which froze production for many of its studios, and the escalating cost of its $1.4 billion in debt, which is held by some of Wall Street’s biggest lenders, including Ares, HPS, and Blackstone itself.

That debt currently costs 12%, people familiar with the matter said, soaking up most of Candle’s earnings. A renegotiation early this year allows the company to keep paying, as it did in its earliest days, a chunk of its interest in scrip instead of cash. That gives the company financial breathing room as it waits for backlogged projects to restart, but ultimately only adds to its debt pile.

“There’s cycles in any company where you’re in a growth phase, you accumulate a little bit of extra cost but it doesn’t matter,” Mayer said. “And then you hit a plateau that causes you to look again at the bottom line and cut costs. It’s a very healthy thing to do.”

A Blackstone spokesman said: “While, like everyone in this industry, there’s been an impact from two once-in-a-generation strikes, we continue to be optimistic about [Candle’s] prospects coming out of the work stoppages and look forward to supporting its growth.”

Candle was a darling of the content bubble, and executed a remarkable wealth transfer from investors to big-name Hollywood talent including Witherspoon and Will Smith, recipient of a disastrous minority investment. (“The lesson there is key-man risk,” Mayer said. “We’re glad we only took a piece.”)

Now, Moonbug has almost single-handedly saved it. Despite a drumbeat of questions from the industry about the company’s strategy, properties including CoComelon make Candle a powerhouse in children’s media, a great business on YouTube, and has a solid foothold in streaming. ATTN is well-regarded and successful, if in a different business than the rest of its holdings. Candle, Mayer said, is “profitable and growing.”

What was pitched as a new model may still depend as much on old-fashioned relationships, and on old-fashioned hit-or-miss bets, as it does on a new approach to media. But you’d much rather be Candle, selling to the streamers, than trying to build a doomed also-ran streaming service like Paramount Plus.

And in the personality-driven world of studios, Hollywood’s eyes are at least as much on Mayer and Staggs as on their company. The two are back in the fold at Disney as advisers to CEO Bob Iger, who at different times passed over each as his successor, and we were eager to hear if they see roles for themselves in Burbank in the future — speculation Mayer was equally eager to bat down.“They have a great bench at Disney, very solid executives, you can tick through them,” Mayer said, then does: Jimmy Pitaro, Dana Walden, Alan Bergman, and Josh D’Amaro. “What I think will happen — and I do not talk to Bob about this, he’s very close to the vest on this — [is that] one of those people will be the next CEO of Disney. If it were Tom or I, or both of us, we’d be quite surprised.”

Mayer also spent four months in 2020 as the CEO of TikTok, and said Candle would not bid on the company’s US business, assuming the government’s forced sale survives court challenges. And he said he doesn’t think a contemplated sale is likely to succeed. It would be difficult, he said, to split the US business off of the global app, and impossible to spin up a new recommendation algorithm for videos in less than a year.

Private equity outgrew its LBO roots years ago. But Blackstone is now in the business of worrying about whether Will Smith slaps somebody on national television. That’s about as far as you can get from pinching pennies at a corrugated cardboard factory, and a sign of how much private equity has changed.

Candle launched with an expensive takeover of Hello Sunshine, which had no profits to speak of and a business that doesn’t scale all that well: Its big hits have all starred Witherspoon, who can only be in so many places at once. It’s a producer-for-hire that has bet on a virtuous cycle of influencers, community, and other buzzwords more often spouted by venture capitalists than their more mature cousins in private equity. Looking back, Candle feels like the rocket launched right at the end of an economic cycle — growthy and buzzy and built around big personalities at a time when those things were more attractive than they are now, two years into a rates cycle that has brought discipline back to investing.

Candle may yet turn out to be a winner, for all the reasons Ben explains above, particularly the undeniability of Staggs and Mayer. They’re good at this.

More broadly, there’s the question of whether Wall Street can roll up Hollywood the way it has rolled up car washes and opticians. TPG, which made money with CAA, last week announced that it was backing a new talent agency and struck the first in what is expected to be a series of roll-ups and minority investments — a very Candle-like playbook.

But if you ask executives at Blackstone or TPG why their firms haven’t done many acquisitions themselves, they’ll tell you that investing is a talent business and that talent businesses are finicky and mostly immune to the financial engineering and operational tinkering that makes deals successful. As Lloyd Blankfein at Goldman Sachs (another place that’s been fairly allergic to M&A) used to say, the assets go up and down the elevator every night.

There hasn’t been a wave of asset manager tie-ups, despite a lot of industry forces pointing in that direction, and it’s because managing talent is, as Staggs told us, “a particular science and art.”