Production Companies changing ownership… why, and what’s it mean?

Banks are applying pressure on debt and covenants
Banks give out umbrellas on sunny days… then want them back when the rain comes!

In the past few days, we’ve seen a couple of press releases, first with Solotech buying Morris S&L and finally, the return of Michael Cannon with his purchase of Mainlight. On the surface, ALL of these are great companies with solid leadership and a plan. But what’s it mean to those businesses and to the industry as a whole?

I’ve been asked this question more than a few times in the past several days, and I’ll address some of my own core thoughts and feelings here… NOTE… (disclaimer to keep us out of trouble)… these are Marcel’s thoughts – not necessarily of the staff or anyone else at GearSource.

First, why are companies selling? That’s a great question… here’s why.

  1. Great companies with solid principals and a great business model, top management and excellent people – are finding themselves in a peculiar position, due to COVID. While those businesses were prepared for short term crisis or a slight downturn (learning from 9/11 and 2008 crash), NO ONE was prepared for 12-18 months! Seriously, the best managed businesses were not ready for this… and that’s not a poke at any of you. This is obviously a pretty unique challenge that we hope to never repeat.
  2. This is a very expensive industry. Audio has transitioned from stacked speakers and analog consoles, to expensive line array systems and digital desks, plug ins, etc. Video, and Lighting are even worse with the endless need for that one added feature designers must have, AND the evolution to LED. As a result, a lot of companies have been carrying large debt. Initially, banks were quite accommodating. “Sure Mr Smith, we can defer payments, even loan you a bit more for your operating costs”.  Add in those handy EIDL loans, and of course, PPP….  this industry has become addicted to OPM (other people’s money). And, those banks and leasing companies who were initially quite friendly? They’ve since become downright ugly. I’ve spoken with owners who’ve made every payment on principal and interest, but missed covenants – and the bank is ready to shut them down. Others have been forced to liquidate assets – based on the value being what it was in 2019… As we know, the market today for these assets isn’t at 2019 numbers… creating more loss of wealth.
  3. A lot of companies walked into this crisis with fresh gear acquired within 2019 cap ex. As we know, 2019 was a banner year… so purchases were made – year end… and many companies are sitting on brand new, unopened 2019 models. This creates a problem for them, but will also create a bottleneck for the manufacturers, since many of those businesses won’t see Capex budgets again until at least 2023.
  4. Good people have been laid off. Many of those people have moved on to other companies or even, other industries. This diminishes value, both short and long term – but also, can slow down already brutal revenues.

The bottom line is that revenues for most businesses have dropped by 70-90%, with no sign of full recovery until 2022. Banks aren’t lending – especially not for operating costs, and you have debt to service – without money coming in. It’s sorta like the perfect storm!

So the answer comes by way of “patient capital”. Money needs to come in to businesses who have been crushed by their banks, their debt service, their overhead and of course, a depleted marketplace. This money isn’t coming from banks, but from either Private Equity (Solotech, 4 Wall, PRG) or private individuals like Cannon, who is putting his own money where his mouth is.

These patient funds – regardless of the source – will allow businesses to survive, cleanup their inventories, manage (or replace) their debt and equally important, to have money to reopen! This is an area that many, who are only focused on survival, don’t see coming. You will need equipment, marketing, salespeople and other operating capital, once the clouds disappear and the sun returns on live events. I am certain that most businesses will have long spent those budgets on survival alone.

So, if you do not intend to sell, yet you’re out of money, what to do? I’ve mentioned it earlier, and I will again! You’re greatest asset is your inventory. And guess what – you likely don’t need most of it today. There are markets in other parts of the world that are wide open, and have live events. GearSource has customers today… and you’ve got inventory. Get to work. Those funds you’re raising may very well fuel your rebound and help you lead in 2022. It should be a barn burner!!

If you’d like to discuss this further, join our weekly Geezers Of Gear Happy Hour on Wednesday afternoons at 5pm – or leave a comment here, and start a conversation.