Redbox Is About to Be Acquired. The Stock Remains Crazily Overvalued.

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The end is near for

Redbox
,
and some investors are about to take a substantial hit as a result.

On Tuesday, Redbox (ticker: RDBX) holders will vote on the pending acquisition of the company by

Chicken Soup for the Soul Entertainment

(CSSE). Under terms of the deal, Redbox holders will receive 0.087 Chicken Soup shares for each Redbox share, which is equal to a little under $1 a share. On completion, current Chicken Soup holders will own 76.3% of the company, and Redbox holders the rest. At the current price of Chicken Soup shares, Redbox holders will get stock worth a little under $1 a share.

The shareholder vote is the last significant hurdle to closing the transaction—and the outcome is a foregone conclusion given investors representing 83.7% of the stock have already committed to supporting the deal. So you have to wonder why Redbox shares are north of $4, more than quadruple their actual value. 

In fact, Redbox shares have traded feverishly, and illogically, from the day the deal was announced in May. The stock at one point in June traded as high as $18.20 a share. It simply makes no sense. The curtain is coming down on Redbox, and some people will get hurt.

To review, Redbox operates a network of 38,000 DVD rental kiosks, largely targeting customers who don’t have broadband access or who choose not to use streaming services. The company has attempted with little success to diversify into digital streaming services. Chicken Soup operates Crackle and other ad-supported video streaming services, and sees synergies in the combination.

The deal effectively bails out Redbox from a potential bankruptcy filing. As of March 31, Redbox had $349.3 million in debt, against just $9.8 million in cash. Without the deal, Redbox has said, there would be “substantial doubt” about its ability to remain a going concern.

The back story is complicated, but sheds light on the situation.

In 2016, former Redbox parent Outerwall was taken private by

Apollo

Global Management (APO) in a $1.6 billion deal. In addition to Redbox, Outerwall owned Coinstar kiosks (for cashing in loose change) and ecoATM, a chain of electronics-recycling kiosks. Apollo still owns Coinstar, and holds a majority stake in ecoATM.

Last October, Apollo took Redbox public via a merger with a special-purpose acquisition company, or SPAC, called Seaport Global Acquisition Corp. Within days of the completion of the deal, Redbox shares traded for as much as $20; but the stock got caught up in the late 2021 selloff of technology shares, and ended the year at $7.41. Apollo maintained majority control.

Redbox as a public company was a bet that in a postpandemic world, movie studios would release more films to theaters, rather than routing everything through streaming services—and that the company could use cash flow from the kiosk business to expand its digital offerings. But the postmerger financial performance missed expectations by a wide margin. 

In a remarkably blunt February SEC filing, Redbox noted that results in the 2021 fourth quarter were hurt by a smaller-than-expected number of theatrical releases, and by the emergence of the Omicron variant of Covid-19.

“As such, Redbox rentals have not recovered to the extent expected and…were lower than the fourth quarter of 2020,” the company said in the filing. “In support of its efforts to expand its business and transform into a multifaceted entertainment company, during the fourth quarter of 2021 and into 2022, Redbox increased its marketing and on-demand expenditures. Costs also increased as Redbox purchased more content. During that period, increased costs have not been offset by an increase in revenues. Redbox’s business has also experienced an increase in competition from new and existing competitors.” 

Redbox in that filing added that it had maxed out its revolving credit facility, and was cutting costs, delaying capital investment, and considering strategic alternatives. On the day Redbox made that disclosure, the stock fell more than 50%.

More than 74% of Redbox shares are controlled by Apollo; another 9%-plus is held by Seaport Global Asset Management, which had sponsored the SPAC. Both have committed to voting in favor of the pending deal. Once the vote is completed, the deal should close as soon as this week. And Redbox shareholders who hang on are going to suffer the consequences.

Redbox didn’t immediately respond to a request for comment.

On Monday, Redbox shares are down 15%, to $4.28. They have a lot further to go.

Write to Eric J. Savitz at [email protected]