CSSE - Chicken Soup for the Soul Entertainment

[nsheth12]

Scott Miller of Greenhaven Road Capital talks about CSSE in his Q2 2018 letter: https://static1.squarespace.com/static/5498841ce4b0311b8ddc012b/t/5b5b794c2b6a28862321e715/1532721485263/Greenhaven+%282018+Q2%29_.pdf.

 

I would recommend reading his write-up. It lays out the thesis quite well. CSSE owns several video on demand platforms, a content distribution business, and a content creation business all under the Chicken Soup for the Soul brand (focused on positive, uplifting content like the book series).

 

As Scott Miller talks about in his letter, CSSE seems like a redemption play for CEO Bill Rouhana. He was previously CEO of Winstar, which was a star stock in the dot-com boom ($10B market cap at its peak). It then went bankrupt. A few years down the line, Rouhana and his wife acquired Chicken Soup for the Soul (CSS), revamped it, and last year IPO'd CSSE. From interviews, Rouhana sees CSSE as CSS's major growth opportunity, and it seems like he wants CSSE to be his "next big thing". The spinoff and IPO of the entertainment business only would make sense from this perspective.

 

I like the set up but I'm concerned about the corporate structure and wanted to hear thoughts. CSSE is a subsidiary of CSS (which is owned by Rouhana) and they have to pay CSS a "management fee" of 5% of revenue every quarter for personnel, accounting, legal, etc. In addition, CSSE pays salary to the top executives, who are employed under the management agreement. They also pay CSS 4% of revenue to use the Chicken Soup for the Soul brand. I'm not sure what to make of these related party transactions, but what's clear is that Rouhana is getting 9% of revenue off the top every quarter. This seems like a bit of misalignment of incentives, especially if this is supposed to be a "redemption" play. What do you think?

[Jurgis]

I was going to look at this. Thanks for saving me the work.  ::)

[Gregmal]

Big fan of the preferred. Pays monthly and yields just under 10%.

[Sergio8]

Looked at this but passed because I don't like the balance sheet, the inflated income numbers, and the strange cash-flow statements.

 

Somewhat reminds me of the dot com era... So this may boom for a while if the public markets (might be an interesting speculation if Bill makes it go to Billion dollar market cap again) are hot but may end badly if the business keeps consuming cash like crazy and no financing is available.

 

I have to admit that they are experts in financing.

[constructive]

It’s weird to me that “redemption play” is seen as a legitimate investment thesis. I would bet that CEOs who have taken a company into bankruptcy earn lower returns in subsequent jobs than the average CEO.

[LongHaul]

A good article on Winstar's history.

 

http://archive.fortune.com/magazines/fortune/fortune_archive/2001/05/14/303001/index.htm