Kudos to David Weinfeld, who examined last month’s news of the termination of the TouchTunes-Victory Acquisition merger in a recent blog post. Well worth reading. David took the time to examine the proxy statement, something I was guilty of not doing in assuming the deal was all but done. He points out that Victory had spoken with several other companies in unrelated businesses before settling on TouchTunes as a target. This is not surprising, as the purpose of a Special Purpose Acquisition Company (SPAC) like Victory is to find the best potential acquisition(s) possible. It appears that Victory’s door to TouchTunes was opened through a relationship with a friend of Red McCombs, who had invested in Barfly prior to its acquisition by TouchTunes. McCombs is one of America’s wealthiest people, having made millions in the car business and as a co-founder of Clear Channel Communications. He has the kind of wealth that allowed him to own three professional sports teams at one time or another, and to endow the Business School at the University of Texas. Red is no slouch, and it is easy to see why having his track record associated with TouchTunes, even indirectly, made it more attractive to Victory.
Weinfeld goes on to examine the risk factors listed in the proxy statement. While the risk factors are very scary statements, they are fairly boilerplate and designed to cover the rear ends of the company making the offer and its investment bankers by making an investor aware of every possible thing that could cause their investment to go south. Those statements are probably not enough to scare off someone who had already invested in a SPAC with no declared target.
However, Weinfeld’s post does review the three daunting things that probably did sour the Victory voters. First, that the hockey stick revenue projections presented in the proxy require a significant leap of faith. Second, that TouchTunes has yet to generate any ad revenue from either Barfly or its massive network of jukeboxes, which relates back to the first item. And third, the astute observation that its PlayPortTT wireless product may have been better deployed as a smartphone app. Of the three, it is the ad revenue dilemma that resonates as an industry-wide challenge.
TouchTunes has over 35,000 video jukeboxes installed that are by any measure a great example of how the internet and digital technology can effectively disrupt and displace entrenched solutions. Their digital screens are seen by millions of people every month, which would presumably be attractive to potential advertisers. But the devices were designed to be digital jukeboxes, and the S-4 filing indicates that TouchTunes expects to make substantial expenditures to continue “its expansion into additional revenue channels, including digital advertising”. So it appears that there is some work to be done to provide the scheduling, distribution, playout and reporting to support that expansion. The proxy statement makes it clear that TouchTunes has that expansion as a priority. Its 2008 acquisition of Barfly, which uses the oft-seen “L-frame” to wrap promotional messages and advertising around a live TV feed in bars, may or may not provide the foundation for some of that work. What is clear, however, is that the same conundrum that has slowed the flow of capital to the industry may well have impacted the TouchTunes/Victory deal: advertising sales.
There is an ongoing circular exercise going on between network owners, advertisers and sources of capital that has been seriously impacted by the fallout of the recession. Network owners need capital to launch their networks. Investors want to mitigate their risk more than ever before and are asking for evidence of revenue (advertising dollars) before investing. Media buyers want to see locations and independent assessment of reach and impressions. Network owners can’t provide that without capital.
The leap of faith to make the DOOH buy has been harder for media buyers to take even though we know they are moving toward out-of-home buys, because advertisers are cutting budget as well. It’s the old trickle down theory, and it is not fun to be the one getting trickled on. The result of all of this is that potential breakout deals like TouchTunes/Victory get shot down; terrific network concepts get delayed or never leave the incubator; and others can’t get past a pilot despite good performance.
The winners in this environment are the networks with existing footprint and advertiser relations and networks being launched by entities that don’t need other people’s money (corporations). I would advance the theory that forward thinking investors will invest in the best new network deals ahead of a recovery, and at advantageous terms. There won’t be a better time to get in than now. When the economic cycle recovers, ad budgets will expand, leaps of faith will be made, deals will be struck and capital will flow like its 1999. That can’t happen soon enough.