The restructuring and distressed investing community isn’t exactly known for being tech-forward. After all, we’re an industry that still depends on, among other things, (i) PACER — the worst website in the history of the web — to pull court pleadings, (ii) firm-by-firm “form” first day papers when those papers could very well be standardized (and save clients tens of thousands of dollars), and (iii) notice by fax (even now, when people aren’t even at their offices!). This week, however, perhaps even you heard about the latest “it” company in the tech startup space: Clubhouse. The social media company centered around live unprocessed talk/audio raised $100mm in Series B funding led by Andreessen Horowitz (which also led the Series A) that reportedly values the company at $1b. It hasn’t yet made a single dollar. 🤷♀️
Clubhouse’s founders are obviously flying high right now. The new “it” boys launched Clubhouse in March 2020 — just in time for the pandemic to homebound a lot of potential users — and the service has grown considerably in ten months. Per the founders:
Clubhouse seemed to strike a real chord with people, and it has accelerated quickly over the past ten months—from a small handful of beta testers into a diverse and growing network of communities. This past week, two million people around the world—musicians, scientists, creators, athletes, comedians, parents, entrepreneurs, stock traders, non-profit leaders, authors, artists, real estate agents, sports fans and more—came to Clubhouse to talk, learn, laugh, be entertained, meet and connect.
The breadth of discussion is intriguing:
The thing we love most is how voice can bring people together. No matter where you live in the world or what networks you have access to, in Clubhouse you can be in the room—often with people whose lived experience has been very different from your own. In one of the most turbulent and troubled years many of us have experienced, people on Clubhouse have come together for important and nuanced conversations on topics of social justice reform, BLM and anti-racism. When Ruth Bader Ginsburg died, room after room filled the hallways with people discussing constitutional law, sharing stories about RBG’s childhood, and praying in silence together. Each week, parents of children with genetic diseases gather in Clubhouse to discuss medical developments with doctors, researchers and other parents—talking, debating and learning.
We’ve also been blown away by the brilliance and creativity of the Clubhouse community. Each night in Clubhouse, there are now thousands of rooms filled with people hosting game shows, recapping NBA games, singing opera, discussing philosophy, meeting other musicians, sharing travel tips, running support groups, and meditating together. They’re hosting daily talk shows, performing standup comedy, playing guitar and giving history lectures. In December, forty strangers who met on Clubhouse auditioned, rehearsed, and hosted a full-blown musical production for thousands of people that made national headlines. They are creating entirely new ways for people to come together, all through the power of voice.
What’s interesting is how the founders intend to use the proceeds: among many other things, they assert that they’ll use the funding to develop and test ways to get content creators paid — through tipping, tickets and subscriptions.
It’s also interesting to read why Andreessen Horowitz found this investment so compelling. Andreessen partner Andrew Chen sponsored the investment and will be joining the Clubhouse board; he wrote:
In a social media landscape that typically compels you to spend hours staring at a screen—often distractedly flitting between multiple screens—Clubhouse lets you multitask while you listen. Like podcasts, you can listen while you take a walk, fold laundry, or work out. It can also be the centerpiece of your evening, like attending a lecture or talk. But it’s also interactive, so if you have something to say, you can raise your hand and chime in. Because you’re listening to people talk, Clubhouse is about a real-time exchange of ideas, not just consuming highly-edited, static content. It’s a fresh experience that brings humanity and context to online social engagement.
Clubhouse lets users communicate nuanced, detailed ideas in conversation; not everything needs to be bite-size or tl;dr. It’s the opposite of a video clip or a short post because it rewards discussion and exploration. I’ve seen rooms where people talk long into the night, eventually falling asleep with the app open. I’ve listened to many interactions among people from different sides of the political spectrum, and it often results in a conversation that’s not unlike what you’d get at a great dinner party. And while some degree of conflict and misunderstanding may be inevitable—no social company is free of these challenges—the team is committed to rethinking the ways we communicate with one another online and is working to build a trusted, safe space for people to be heard.
The team has been building features to make it easier to moderate rooms and clubs, as well as working with creators to develop a business model that rewards the entire ecosystem as Clubhouse’s community grows. I love that this orientation contrasts with the typical ad-based business model that has supported social networks in the past. This centers the experience around community and quality, rather than clicks and volume.
If that last bit sounds familiar it’s because this is the exact same logic underpinning the formation of Substack, the tech that powers PETITION. The Substack founders started their company because they grew tired of outrage; they were frustrated with the fact that outrage drew clicks and clicks earned revenue through ads. They wanted creators to have a direct relationship with their readers. If creators are accountable to their readers, the thinking went, they’ll no longer need to traffic in outrage for the sake of chasing virality for the sake of generating ad revenue. It’s no coincidence, therefore, that Mr. Chen is the same investor who led Substack’s Series A financing eighteen months ago.
Lots of other folks are also bought in.* Here’s one supportive thread (click through)⬇️.
Axios’ Dan Primack wrote:
This is a very high-risk/high-reward bet. The risk is that the audio boom is being artificially inflated by the stay-at-home pandemic, and that Andreessen Horowitz's confidence is colored by some of its partners' own addictions to using Clubhouse. The reward is that this is the next evolution of social networking, and that Andreessen Horowitz just preempted other investors like Sequoia Capital once did with WhatsApp.
Bloomberg’s Tae Kim wrote:
…since installing Clubhouse I have noticed my time spent on the app is significantly higher than any other social network on my smartphone — more than TikTok, Twitter or Instagram. It is a sign of how appealing audio-based social networking can be. And judging from the activities of my friend list inside the community, I am not alone. I have little doubt once Clubhouse opens up to the general public, its user base can grow into the tens of millions. The social media giants should be concerned.
All of this hype and the company is still technically in beta. Access is by invite only. And it’s also only available on iOS. There’s still a lot of room for this sucker to run.
Back in 2017, Netflix Inc.’s CEO Reed Hastings famously quipped that Netflix’ biggest competitor is sleep. “You get a show or a movie you're really dying to watch, and you end up staying up late at night, so we actually compete with sleep,” Hastings quipped while dripping with arrogance.
A lot has changed since then. Epic Games’ Fortnite became a thing. Likewise Roblox and all-things-gaming like Twitch have seen exponential growth. And, of course, the competition in streaming is intense. There is Quibi…lol…jk…rip Quibi. There is Disney+, which has enjoyed extreme traction, HBOMax, AppleTV (PETITION Note: Ted Lasso is quite good), etc.
Similarly, podcasts are also on the rise. Spotify Inc. ($SPOT) is trying to corner the market with exclusive podcast deals with the likes of Joe Rogan and others but the competition is heating up: Amazon Inc. ($AMZN) recently acquired podcast producer Wondery, the network behind podcasts such as “Dirty John” and “Dr. Death.”
All which begs the question: who the f*ck has time for all of this sh*t?
Note Andrew Chen’s point above about multi-tasking. Rather than have The Office on in the background for the 198th time, you could do your work while listening to a talk on Clubhouse! Ben Thompson doubles down on this:
The most obvious place to start when it comes to thinking about Clubhouse is the fact that it is audio-based. This has a few obvious implications, including the fact that it’s total addressable attention space (TaaS, and yes, I just made that up) is both much larger than visual-based alternatives, and also not really competitive with existing social networks. Every minute spent on TikTok, for example, is a minute not spent on Facebook, whereas Clubhouse can be listened to while you are doing something else.
Except maybe not while also listening to podcasts or radio. Does this mean that Clubhouse may be a headwind for podcasts and radio?
…the biggest barrier to podcasting remains just how difficult it is, from a podcaster perspective, to acquire users, and, from a listener perspective, to find shows you are interested in; this is why I have advocated that media organizations take a wholistic approach to mediums, using text for user acquisition, and podcasts for monetization.
This is also one of the reasons why Clubhouse is interesting: podcasts may be easy to make, at least relative to radio, but starting a conversation on Clubhouse take nothing more than the touch of a button; it is just as easy to join an ongoing conversation, and, crucially, invite your friends. Here the power of “live” is brought to bear: the fact that I can listen to a podcast at any time actually reduces the likelihood I will take you up on your invitation to listen; a demand that I jump in now, though, before the moment passes, is much more compelling.
It is also a lot more like radio; part of the job of being in the background is not demanding too much of the listener, and sometimes I just don’t want to figure out what podcast to listen to next; I would rather listen to the radio and let the DJ or talk show host figure it out for me. Clubhouse does the same job, but, at least in theory, with far more options and, crucially, far more passive ways in which to explore those options (i.e. the feed and friend recommendations).
Thompson goes on to clarify that he’s by no means predicting “the doom of podcasts.” Quite the opposite: he argues that Clubhouse could eventually be used to sell customers subscriptions to podcasts, similar to podcasts currently being used to sell people books.
Still, time is finite:
And the hits just keep on coming. Twitter Spaces ($TWTR) is YET ANOTHER audio product that’s hitting the market. And for many of the reasons delineated here, it sounds fairly compelling. Twitter clearly doesn’t want Clubhouse being the “town square” it envisions for itself.
All of this makes you wonder what happens not just to podcasts and radio but also conferences and … gulp … other IRL social events like panels (remember those?). Why would anyone pay to see famous speakers at a conference when you can just listen to them on Clubhouse for (maybe?) a nominal fee from the comfort of your living room? Sure, conferences aren’t just about the speakers but if they’re not at least partially about the speakers, why do organizers nevertheless clamor for big names to take the stage? Also, to what degree will brands and advertisers shift budget to these new content creators? Generally speaking, ad dollars are zero sum.
All of which is to say that the rapid rise of new forms of social audio is worth watching. It may end up creating a new cohort of winners and losers.
*Not everyone. Union Square Ventures’ Fred Wilson wrote in a pithy essay titled “Controlling Your Destiny”: “I blog on WordPress using a host that I have selected and can move from at any time. WordPress is open source software and I can download it and run it on my own machines if I want to. I don’t. But being able to do that is key. Medium and Substack and Clubhouse and Twitter, etc, etc are fantastic. They make it drop dead simple for anyone to share their thoughts with the world. But they are controlled by someone else. You can get kicked off. And when you get kicked off, you lose all of your followers, all of your content. Gone. I’m not down for that. Nor should you be.” The point is obviously particularly salient after what happened to Parler in the wake of the Capitol uprising.
📻New Chapter 11 Bankruptcy Filing - Alpha Media Holdings LLC📻
Totally unrelated yet strangely ominous, Alpha Media Holdings LLC (f/k/a L&L Broadcast Holdings LLC), an Oregon-based privately-held radio broadcast and multimedia company, filed for chapter 11 bankruptcy in the Eastern District of Virginia on Monday (along with 15 affiliates, the “debtors”).* The debtors own more than 200 radio stations with programming that spans local news, sports, music and entertainment, broadcasting to more than 11mm listeners in 44 communities across the United States. They also own over 200 websites and other tech like mobile apps. The internet being a heaping fiery cesspool, the debtors generate the majority of their revenue from the sale of radio ads to local, regional and national advertisers hocking sh*t like cars and financial services to consumers/listeners.
Notwithstanding anything we may have previously said about ad models versus subscription models or new social audio competitors, this filing is, for now, a balance sheet story rather than a disruption story. Felled by COVID-19, the debtors entered into a restructuring support agreement with their creditors to recapitalize $267mm of pre-petition debt that breaks down something like this:
Not to state the obvious, but debt like that is awfully hard to service when the small to medium-sized businesses that make up the majority of ad revenues are going kaput rather than taking out ads. Here is a chart that reflects the debtors monthly revenue (shown as a percentage of 2019 revenue):
On a YOY basis, as of November 2020, net revenue excluding political revenue declined by 26% YOY.
As revenue deteriorated, the debtors and their professionals embarked on a restructuring crusade that ran the gamut of options. First, the debtors’ banker, Moelis & Company ($MC), pitched strategic alternatives to the market. That didn’t work. Then the parties received inbound inquiries from, listened to and negotiated a proposed transaction with, two of the debtors’ equityholders, Stephens Media Group and Breakwater Broadcasting Funding LLC. That proposal proved insufficient. Then the second lien lenders got in the ring and made a variety of proposals and suddenly the debtors — armed with two new independent directors — had the benefit of parallel negotiations. Unfortunately, however, neither of the tracks would provide the debtors with the relief they desperately needed: (a) the right-sizing of their existing cap stack and (ii) an influx of fresh liquidity so as to position the debtors for future success. Moelis, therefore, re-instituted a capital raise process. That process drew feedback that any refinancing of the $90mm of first lien debt would require a meaningful equity cushion. Someone was gonna have to write a check.
Stephens and Breakwater busted out their pens and checkbooks! The two funds proposed a $120mm transaction backed by a 67/33 debt/equity split. The second lien lenders and the first lien lenders submitted DIP proposals in support of the Stephens/Breakwater offer. The first lien lender proposal sought to finance the sale of substantially all of the debtors’ assets with Stephens/Breakwater serving as stalking horse purchaser. The second lien lenders, on the other hand, proposed a $37.5mm new money commitment that would equitize the existing second lien debt and senior unsecured notes; they also proposed financing a $15mm junior DIP to fund a prepackaged plan to effectuate all of this.
Suddenly, the first lien lenders no longer had an appetite to lend more cash into this situation and supported the second lien proposal rather than pursue the sale process. The professionals began documenting the deal.
But wait! The story wasn’t over. Even though the debtors commenced solicitation of the plan on January 8, the first lien lenders were like…
…blew out of the structure (on the last day of voting) and dumped their holdings with Fortress. Fortress immediately blew up the deal: it was not willing to support the proposed prepackaged plan or provide a junior DIP. Here’s a live shot of Fortress at the negotiating table:
And here’s a live shot of the debtors’ professionals realizing they’d have to paper a new deal despite getting to the goal line with what appeared to be a fully consensual deal — over a three-day weekend, no less:
Think we’re exaggerating? Per the debtors:
In the days following the sale of the first lien loans, given that the ICG Prepack Proposal and Consensual Junior ICG DIP Proposal were no longer available, the Debtors’ advisors worked around the clock to negotiate the terms of a deal that would allow the Debtors to commence chapter 11 cases, access debtor-in-possession financing, and effectuate a balance sheet restructuring. (emphasis added)
Living the dream, folks. Here’s a live shot of some poor junior associate thinking about Fortress blowing up her weekend:
According to the debtors, Fortress did ultimately offer a DIP financing proposal that contemplated a sale process without a stalking horse. In turn, the second lien lenders again proposed equitizing their paper (for 100% of the equity subject to a management incentive plan). Attached to that proposal was an offer of $37.5mm of new money in the form of a second lien secured note purchase facility. Ultimately, the debtors opted for the latter route, signing a restructuring support agreement with the second lien lenders and the unsecured noteholders and filing a plan that reflects the terms thereof. Pursuant to that agreement, general unsecured claims will be unimpaired.
So what does that mean for Fortress? Well, for starters, to the extent they bought into the first lien loan (at par) to finagle a DIP loan (yield, baby, yield), that effort didn’t exactly go according to plan. The debtors shot down the proposed DIP because (a) it was relatively rich AF, with significant fees on both the new money and roll-up components, (b) it contemplated a full roll-up of the pre-petition first lien debt, and (c) it was contingent upon a sale process sans stalking horse. And so they are not a party to the RSA; they are impaired under the plan in that they will get “first lien recovery notes” or cash; and they are not a released party under the plan. In other words, the existing first lien debt will remain in place during and after the chapter 11 cases. And the debtors propose to prime their first lien paper.
Wait. A priming fight? You don’t see many of those anymore. But have no fear! The debtors’ banker argued that Fortress is sufficiently adequately protected because there is a sufficient equity cushion that exceeds the value of Fortress’ claim. In a declaration, Moelis’ banker stated, “Based on the Valuation, I estimate the value of the Prepetition First Lien Lenders’ collateral, which includes substantially all of the Debtors’ assets, at a range of between $145 million and $175 million. Because the amount outstanding under the Prepetition First Lien Credit Agreement is approximately $90 million, I estimate that the Prepetition First Lien Lenders, therefore, have an equity cushion of approximately between 60% and 90%.” The bankruptcy court down in Virginia — which is becoming known for its willingness to accommodate debtors — granted the debtors’ interim order.
Speaking of that valuation, it is based on some fairly modest projections. Not like MyTheresa modest, but modest. The debtors anticipate “… revenue growth is expected to be constrained by the pace of the broader economic recovery as well as the recovery in the radio broadcasting industry. In particular, 2023 revenue is forecast to be $176.7 million, which is 1.1% below 2019 revenue of $178.7 million.”
Query to what degree — if at all — any new challengers competing for your ear over the next several years will impact those figures.
*The debtors are 25%-owned by Stephens Media Group and nearly 19%-owned by Endeavour Capital, a fund that invests primarily in Western US-based middle market companies (and restructuring advisors like Berkeley Research Group…go figure). Another major equityholder is Breakwater Broadcasting Funding LLC, which owns 10.27% of the equity; it is a private investment firm that invests directly in lower middle-market growth businesses.
In Sunday’s hospitality coverage, we wrote the following about the EHT US1 Inc. a/k/a Eagle Hospitality Group matter (in a footnote):
At the first day hearing, the debtors sought authority to use $40mm on an interim basis but got shot down by the bankruptcy court upon an objection from Bank of America.
This was imprecise. While BofA did object to the interim amount requested (Docket #42), the bankruptcy court did not shoot down any and all interim DIP funding — which is certainly one way our footnote, as written, could have been construed. Rather, the debtors and BofA consensually agreed to a lower interim funding amount and the bankruptcy court entered an interim order reflecting as much at the first day hearing (without so much as even addressing the objection). We apologize for any confusion on the point: as we’ve said repeatedly, we’ll occasionally get things wrong and that’s why we encourage y’all to write us, call us morons (if we deserve it), and force corrections. Cheers!
Columbia Business School’s 27th Annual Private Equity Conference is taking place from Monday, February 8th through Thursday, February 11th and will be conducted online. The conference will feature distinguished keynote speakers including Howard Marks (Oaktree); Dr. Kai-Fu Lee (Sinovation Ventures); General (Ret.) David Patraeus (KKR, KKR Global Institute); Ian Sigalow (Greycroft); Alan Patricof (Greycroft); and Frank Baker (Siris). There will also be a distressed investing panel led by Michael Gatto from SilverPoint. Tickets and more information are available here.
As always, we like to hook up our PETITION Members. If you’re a PETITION Member and you’re interested in attending, please complete this form. CBS has been kind enough to grant us five free admissions.
We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.
We inadvertently demoted some folks last week so allow us to fix ourselves:
Isabella Montani has been promoted from Senior Associate to Director at SierraConstellation Partners. We said she’d been promoted to Senior Associate. Apologies.
Christian Sorensen has been promoted from Director to Senior Director at SierraConstellation Partners. We’d said he’d been promoted to Director. Apologies.
Anuj Saxena (Managing Director) joined Portage Point Partners LLC from AlixPartners LLP.
John Cesarz on his promotion to Partner at Perella Weinberg Partners.
Edward Weisfelner on his retirement from Brown Rudnick LLP. The announcement conveniently fails to mention the most recent chapter in Mr. Weisfelner’s long and storied career: the Neiman Marcus fiasco. While it would, no doubt, be a shame to cloud an accomplished career full of legal and charitable service with an unfortunate episode, it also doesn’t do the bankruptcy bar service to just sweep it under the rug. At a minimum, there should be an ethics case study coming out of this.
The following folks who were promoted to Director at AlixPartners: Jon Baluzy, Eric Deichmann, Rohan Joseph, Andrew Parchem, Raju Patel, David Samikkannu, Ryan Sublett, and Michael Westermann.
The following folks who were promoted to Senior Managing Director at Ankura: Dennis Barrett, William Brown, Michael Fey, and Ryan Roy.
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