2010.40 Stress in Hollywood and recent media services developments
As you know, Megan and I are focused on the media services sector: the software, system, application, service and equipment rental companies that support the content ecosystem. We often refer to this universe of companies as “first derivative plays” on the media/content business.
Megan’s post Thursday on Technicolor’s divestiture of its Grass Valley Broadcast business to Francisco Partners covered an important transaction in the broadcast equipment business. I want to go further and connect a few recent data points:
- Data point number one, April. Eastman Kodak sells its post-production service business Laser-Pacific to an affiliate of H.I.G. Capital portfolio company Telecorps. Telecorps had previously acquired Wexler Video, Coffey Sound, PostWorks New York, Orbit Digital and Hulu Post since 2007. Terms were not disclosed, but word on the street is that Kodak received modest consideration for Laser after having acquired the business for over $30 million in 2004 (FULL DISCLOSURE: Hadley Partners owns an immaterial interest in Telecorps).
- Data point number two, July. Technicolor sells its Grass Valley Broadcast business to Francisco Partners. As recounted in Megan’s post, GV lost 52 million Euros in the broadcast business last year, and Technicolor is selling GV to Francisco for no cash consideration – just a note and an earn-out. In fact, Technicolor is contributing 20 million Euros to the company at closing.
- Data point number three, July. As covered in the Wall Street Journal Thursday (subscription required), Eastman Kodak’s movie film business is shrinking faster than previously expected due both to less film production generally and the transition of theatrical exhibitors from film to digital distribution. Kodak’s “entertainment imaging” revenue fell 18% in the June quarter vs. the prior-year period.
- Data point number four, ongoing. We have heard from several sources that Ascent Media is soliciting bids for all or part of the Company.
I could go on, but you get the point. Technicolor, Grass Valley, Eastman Kodak, Ascent Media – these companies are all leading vendors into the film/TV entertainment industry. There is dramatic stress throughout this food chain. The stress is due partly to financial factors (movie making is one of the last great capital-intensive businesses, and you might have noticed that the cost of capital has risen in the last three years). It is also indicative of the fundamental shift from analog to digital throughout the video workflow cycle (from capture to display). The gale-force winds of Moore’s Law will dramatically improve price/performance for customers in this sector as it goes digital, but it is not at all clear that volume will rise enough to support the business models of many vendors.
I’ll end with an advertisement for HPi. If you an owner, investor, executive, entrepreneur or director in the media services industry, you need to understand the very powerful forces that are squeezing many of the leaders. And you need a financial advisor who understands these currents and has significant transactional experience navigating in all business environments. Call us if it is time to talk.
