Text size
Redbox’s 36,000 DVD-rental kiosks are now owned by Chicken Soup for the Soul Entertainment.
Dreamstime
One of this year’s most surprising tech deals was the acquisition of the movie-rental kiosk chain Redbox by
Chicken Soup for the Soul Entertainment
.
Don’t let the name fool you: Chicken Soup for the Soul is a video-streaming company that just happens to have grown out of the popular book series.
Today, Chicken Soup owns Crackle and other ad-supported video-streaming services. The Redbox deal gives the business some real scale, and it has turned the company into a bargain-bin small-cap bet on the future of video—one that the market is largely ignoring.
Chicken Soup’s roots go back to the well-known series of inspirational self-help books created by the writers Jack Canfield and Mark Victor Hansen. Since the original book was published in 1993, there have been more than 250 follow-ups (Chicken Soup for the Golfer’s Soul, Chicken Soup for the Preteen Soul, etc.), which together have reportedly sold more than 500 million copies. By 2007, Canfield and Hansen had begun to search for a buyer for their company, which included not only the Chicken Soup books but also a line of pet foods sold under the Chicken Soup brand.
They eventually found William Rouhana, who some investors might remember as the CEO of broadband provider Winstar Communications, which went bankrupt in 2001 as the internet bubble was popping.
Rouhana separated the books and pet-food business from the video segment and took the video-focused Chicken Soup for the Soul Entertainment (ticker: CSSE) public in 2017.
Prior to the Redbox deal, Chicken Soup owned a handful of other streaming assets, including Crackle (which it bought from
Sony
in 2019), a service under the Chicken Soup name, and a small ad-supported movie site called PopcornFlix.
Chicken Soup ultimately paid about $70 million in stock for Redbox and assumed $350 million in debt. The deal included an agreement to push out the due date on the Redbox debt, giving Rouhana time to clean up the company’s finances.
As the deal was pending, some Redbox holders bet that another bidder would emerge, at one point driving the price of Redbox shares to many times the value of the deal price. But Redbox never got any other options. The company was out of cash and likely headed for bankruptcy, a victim of a dramatic slowdown in film production during the pandemic. Rouhana says Redbox customers were still going to the kiosks but weren’t finding many new movies to rent.
With the transaction, Chicken Soup adds a network of 36,000 kiosks and expands its head count to about 1,500 from 200. The deal also revamps the company’s financial profile. In an interview at the modest Chicken Soup headquarters, above a CVS in Cos Cob, Conn., 35 miles north of Midtown Manhattan, Rouhana says the combined company should have earnings before interest, taxes, depreciation, and amortization, or Ebitda, of between $100 million and $150 million in 2023. Revenue should be at least $500 million, he says, about twice the Wall Street consensus forecast for 2022.
If Rouhana’s forecast is accurate, Chicken Soup’s stock—down about 50% since the deal closed—looks ultracheap. The company has a market value of just $164 million, and an enterprise value of a little over $500 million. “The market is just not accepting that there is a turnaround inherent in the situation,” Rouhana says.
Rouhana says Redbox revenue is historically tied to the number of new DVD releases available in its kiosks. In the fourth quarter, the number of new release rentals should jump to 35, from 13 in the current quarter, he says. In the long run, Rouhana expects the kiosk business to be a cash cow that generates capital for the company to invest in its core streaming business.
As my colleague Jack Hough noted in Barron’s cover story last week, the decision by
Netflix
(NFLX) and
Walt Disney
(DIS) to launch ad-supported streaming tiers has cast a new spotlight on the potential for advertising in the streaming world, a category known as advertising-supported video on demand. Rouhana says the development “provides validation for the AVOD model” and should convince more advertisers that they “need to be there.” At least a dozen smaller ad-supported services like Philo and Crunchyroll have hired Chicken Soup to sell advertising on their behalf, Rouhana says.
The CEO notes that Chicken Soup is the only pure play among the five largest ad-supported streaming services, a group that includes FreeVee, owned by
Amazon.com
(AMZN); Tubi, acquired by
Fox
(FOX) for $440 million in 2020; Pluto, acquired by Viacom, now
Paramount Global
(PARA), for $340 million in 2019; and the Roku Channel, owned and operated by streaming-platform company
Roku
(ROKU). Rouhana thinks there is consolidation coming, and says that Chicken Soup expects to be a buyer. Rouhana isn’t talking about being on the other side of the deals, but it’s also conceivable that Chicken Soup itself could one day become a target.
In the long run, Rouhana says the ad-supported streaming model should eclipse the subscription business that has come to dominate the market. What Chicken Soup and others need to do, he says, is provide quality content, make it easy to find, and offer advertising that is both relevant and interesting to consumers. “That’s all doable,” he says. “Every piece of that is under way inside our company right now.”
If Rouhana’s vision plays out, his book could be called Chicken Soup for the Bullish Soul.
Write to Eric J. Savitz at eric.savitz@barrons.com
