Weekly Reads - September 18, 2023
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The future of streaming could mirror the past with cable-like bundling of different services with cable companies and streaming platforms working in tandem to reduce churn, customer acquisition costs, and to deliver a better customer experience .
The Charter-Disney dispute left many public outlets to crown Charter as the winner, gaining access to Disney+ basic ad-supported and ESPN+ content and having the flexibility to offer a range of packages at different price points, avoiding the need to push sports into every package. However, the true winner is likely both Charter and Disney with both companies likely to benefit from the current arrangement long-term. Outside the obvious short-term gains from these deals, Charter has strengthened its relationship with Disney being able to offer Disney+ to its clients alongside its cable packages. Instead of having to compete with Disney’s DTC platform, it can now offer it as part of Spectrum TV, giving its customers more choice in what content they have access to. There is a future here for Charter in which they can negotiate these types of deals with other streaming services and act as a distribution point for different streaming content by bundling different services for customers. Instead of having to sign up for five different streaming services across five different apps for $50 a month, Charter could bundle them together and sell it for $40 a month via Spectrum TV under one platform creating additional value for the end consumer. This new model would allow Charter’s video business to survive instead of slowly heading to zero acting as a distributor of streaming content. Disney could be the biggest long-term winner with Charter now incentivized to push Disney+ content to its subscribers. Cable historically was the most profitable channel for content providers who generated massive affiliate fees from Charter with no need to worry about customer acquisition and distribution. Cable allowed content providers to share content resources because with the content being bundled there was less pressure to consistently make new content to retain users. With Charter offering Disney+ in conjunction with cable content, Disney could see less churn since there is other content outside Disney to keep consumers satisfied. Disney+ also doesn’t have to worry about customer acquisition since Charter has the responsibility of pushing that content to Spectrum users setting up this relationship to be a profitable Disney+ channel. While streaming sought to unbundle content, we could be headed full circle to a world where bundling returns with more and more content fragmented across different streaming services and the streaming model proving to be far less profitable than the old cable business was.
The use of NAV loans by private equity funds is masking theimpact of poor quality investments on private equity portfolios setting up apotential disaster if market conditions don’t improve and these firms see along-term slowdown in fundraising and the IPO market.
Private equity firms have started to borrow against their funds as a way to cope with higher interest rates and slowdowns in deals. Lenders have coined this as “defending the portfolio” with older private equity funds running low on cash while their portfolio companies struggled with high debt. These funds are now leveraging net asset value (NAV) loans which use their investments as collateral helping pay down portfolio company debt. These NAV loans allow private equity funds to negotiate lower borrowing costs than if they would try to obtain a loan themselves since they are borrowing a against a larger pool of assets. A recent example has been Vistra Equity Partners who took a $1 billion NAV loan that they allocated to financial technology company Finastra to convince lenders to refinance Finastra’s maturing debts. Vistra felt that this loan was better than anything they could have negotiated separately, and it would help Finastra lower their overall interest cost. The popularity of these NAV loans has come at a perilous time for private equity funds who have seen a slowdown in fundraising, takeovers, and IPOs. This slowdown has left private equity funds holding companies longer than expected with debt maturities coming up in 2024/2025 and a growing need to find alternative ways to keep debt-heavy companies solvent with interest rates rising. The issue with these NAV loans stems from the portfolio risk you take to prop up one or two bad companies. In essence, NAV loans are a financial engineering tactic in which you borrow against an entire portfolio of assets to prop up one or two bad investments from going under. If these bad investments can turn around and later be exited at an attractive level this tactic works, but if that fails you risk losing quality investments as collateral or impairing your funds returns going forward. Regardless of the risk, there has been no slowdown in demand for these loans with inquiries rising and new lenders entering this market.