The Playboy Leveraged Buyout, Two Years Later

Almost exactly two years ago, I wrote a short piece on Hugh Hefner’s leveraged buyout of Playboy Enterprises and commented that the company was transitioning away from its adult media businesses and into licensing and brand management.  Essentially, founder Hugh Hefner wanted to turn his company into something like a Dolce and Gabbana, but with an edgier reputation.

It’s easy to understand Hefner’s motivation.  The internet had taken a wrecking ball to his business model.  Magazine and newspaper sales are in terminal decline. (Remember, men buy Playboy Magazine for the articles. Really.)   And it’s difficult to turn a profit in adult media given that you’re effectively competing with free.

Playboy Enterprises definitely had the pieces in place.  The Playboy bunny is one of the most recognizable brand logos in the world, and the robe-wearing, pipe-smoking Hefner is a brand in of himself.  Long after the 86-year-old Hefner passes, his image will have marketability.  It’s crass, but it sells.

Incidentally, Hefner is grooming his 21-year-old son Cooper to wear the robe and carry the pipe after he is gone, becoming the public face of Playboy.  Given that the company already has professional management currently led by CEO Scott Flanders, it’s not entirely clear what the young Mr. Hefner’s role will be other than attending extravagant parties with beautiful young women on each arm.  I suppose it’s a hard job for a young, red-blooded American male, but someone has to do it.

All joking aside, the young Hefner’s role will be extraordinarily important if Playboy Enterprises is to have a future.  Because now more than ever, the company is selling a feeling rather than a product: the aspirational image of the modern bon vivant. Think about the “most interesting man in the world” commercials for Dos Equis beer.  This is the image they are going for.  If Cooper Hefner is to sell the lifestyle as effectively as his dad, he has a large robe to fill.

So, how is the company’s transformation going?

Actually, not that bad.  Since taking control of the company in 2009, Flanders has cut the payroll by 75% and sold off some its older media businesses.  Revenues are down from $240 million in 2009 to just $135 million in 2012.  But profits have nearly doubled, from $19.3 million to $38.9 million (measured as adjusted EBITDA).

Playboy is distancing itself from what most people would consider pornography, ditching its video business and offering media without nudity.  The Wall Street Journal calls it Less Smut, More Money. The company even has an iPhone app and a SiriusXM radio station.  And of course, there was the popular E! series The Girls Next Door.

The company is hoping to go public again in 2014, but it’s going to have a hard time getting there.  Licensing only accounted for $62 million of its $135 million in revenues last year, and the magazine continues to lose money.  The company is in violation of its loan covenants and may get downgraded by Standard & Poor’s.  And Playboy Enterprises’ ability to grow and go further mainstream will be limited by its toxic association with pornography and by the general cloud of sleaze surrounding its image.

And if the company does go public again, institutional investors will not exactly be lining up to buy shares.  If tobacco, alcohol and gaming stocks are difficult to own in the age of political correctness, then imagine having to justify a social pariah like Playboy to the trustees of a pension plan, foundation, or university endowment.

I wrote last year that Not All Sin Stocks are Created Equal, and Playboy Enterprises is a perfect case in point.  Its brands have value, but its core businesses have no moats.  If the company is successful in cleaning up its sleazy image and builds its licensing revenue streams high enough to compensate for a failing print media business, then the company might have a future.  Whether that future is enough to sustain the lifestyle created by Mr. Hefner is another story.

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