For Hollywood moguls running the world’s biggest entertainment studios, cash is king.
Disney, Warner Bros. Discovery, Paramount, Fox and Lionsgate are sitting on top of a record $21 billion cash hoard. This is the number everyone in Tinseltown should be looking at as the nation buckles into a recession — not how many subscribers signed up for streaming services with little signs of turning a profit.
Here’s why Hollywood screenwriters, actors, executives and artisans should care: Their jobs might entirely depend on how much studios can stash underneath the mattress. This extra cash can be deployed by way of dividends to keep investors happy, buttress balance sheets to prevent layoffs and provide a powder keg to scoop up companies weakened by an economic downturn.
That’s the good news. The bad news is that no matter how much CEOs bragged during the second-quarter earnings cycle about the amount of money they’ve saved up, it won’t make much of a difference if a recession is prolonged 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,” said Hal Vogel, a veteran entertainment industry analyst who authored the 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 finally caught a break on Wednesday proclaiming that its cash on hand hit $13 billion during its fiscal third quarter, by far the industry’s biggest amount. 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 cash that CEO David Zaslav said would be boosted because the combination of the two media giants will score “significant free cash flow generation and growth.” The company logged about $4 billion in cash spent as part of Discovery’s acquisition of the iconic studio from AT&T.
Paramount CEO Bob Bakish said the studio will “continue to maintain significant financial flexibility” with $4 billion in cash and a $3.5 billion untouched credit line. Lionsgate CEO Jon Feltheimer — whose company is considered both a takeover target and acquirer — pointed out the company has about $380 million of free cash and “significant liquidity” with a $1.25 billion untouched credit line.
To be sure, Hollywood is nowhere near the levels that America’s big tech firms are squatting on.
Apple alone has about $206 billion in its mad money stash. In fact, there are 13 tech companies that are sitting on just over $1 trillion of cash saved up — bulldozing over the other $2 trillion expected from the rest of the Standard & Poor’s 500 components, according to the index’s chief analyst Howard Silverblatt. (He said in February, S&P 500 companies now have enough cash to give $8,131 to every man, woman and child in the U.S.)
That liquidity matters for consumer-facing companies that bank on everything from box office and theme park tickets, to merchandise sales and streaming subscriptions. This is what helps prop up their businesses on the threat that advertisers will rein in spending because consumers are tightening their belts as inflation notches higher.
“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,” said Bret Jensen, chief investment 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, using that cash for dividends (or even stock buybacks) are a way to at least keep investors from not selling. Stock buybacks have never been a good option, said veteran analyst Vogel, since they tend to buy at the top of the market when everybody is bullish. For instance, Netflix announced in April 2021, a $5 billion stock buyback when shares were trading 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 economy shows signs of mild weakening, and Hollywood studios are sitting upon mountains of cash with no real way to invest it? This won’t be dead money. There won’t be transformative deals like Discovery’s $43 billion acquisition of Warner Bros. or Disney’s $71.3 billion acquisition of Fox’s film unit, but there are spot deals to snatch intellectual property, management teams and holes that need to be filled.
But the big studio machines will have some competition. Hedge funds, venture capital firms, vulture syndicates and private equity players 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,” said Matt Rosenberg, a managing director and head of media finance for asset manager Monroe Capital, a middle-market lender that’s making a new push into Hollywood deals. “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 private equity firms like Apollo and Blackstone Group have been investing heavily in Hollywood production companies, especially as major streaming services are in a content arms race to outdo the other. By all accounts, an estimated $50 billion to $100 billion a year is being spent on creating content that lures new streaming subscribers. And, while the huge entertainment companies are focused on their platforms, big investment firms are trying to cash in.
For instance, Apollo earlier this year bought a $760 million stake in Chinese-owned (and former Thomas Tull-run) movie studio Legendary Entertainment that was behind films like “Godzilla” and “Dune.” Peter Chernin’s production company, The North Road Co., is being financed by $500 million from Providence Equity Partners and $300 million in debt from Apollo to get smaller deals done. Candle Media, run by former Disney execs Tom Staggs and Kevin Mayer, has a multibillion-dollar war 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,” said 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.”
