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Redbox Is About to Be Acquired. The Inventory Stays Crazily Overvalued.

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Redbox was damage by a guess that theater releases of movies would surge in a postpandemic world.


Dreamstime

The top is close to for



Redbox
,

and a few traders are about to take a considerable hit consequently.

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



Chicken Soup for the Soul Entertainment

(CSSE). Underneath phrases of the deal, Redbox holders will obtain 0.087 Rooster Soup shares for every Redbox share, which is the same as somewhat underneath $1 a share. On completion, present Rooster Soup holders will personal 76.3% of the corporate, and Redbox holders the remainder. On the present worth of Rooster Soup shares, Redbox holders will get inventory price somewhat underneath $1 a share.

The shareholder vote is the final important hurdle to closing the transaction—and the end result is a foregone conclusion given traders representing 83.7% of the inventory have already dedicated to supporting the deal. So you must marvel why Redbox shares are north of $4, greater than quadruple their precise worth. 

In actual fact, Redbox shares have traded feverishly, and illogically, from the day the deal was announced in May. The inventory at one level in June traded as excessive as $18.20 a share. It merely is not sensible. The curtain is coming down on Redbox, and a few individuals will get damage.

To overview, Redbox operates a community of 38,000 DVD rental kiosks, largely focusing on clients who don’t have broadband entry or who select to not use streaming providers. The corporate has tried with little success to diversify into digital streaming providers. Rooster Soup operates Crackle and different ad-supported video streaming providers, and sees synergies within the mixture.

The deal successfully bails out Redbox from a possible chapter submitting. As of March 31, Redbox had $349.3 million in debt, in opposition to simply $9.8 million in money. With out the deal, Redbox has stated, there can be “substantial doubt” about its means to stay a going concern.

The again story is difficult, however sheds mild on the scenario.

In 2016, former Redbox dad or mum Outerwall was taken personal by



Apollo

World Administration (APO) in a $1.6 billion deal. Along with Redbox, Outerwall owned Coinstar kiosks (for cashing in free change) and ecoATM, a sequence of electronics-recycling kiosks. Apollo nonetheless owns Coinstar, and holds a majority stake in ecoATM.

Final October, Apollo took Redbox public through a merger with a special-purpose acquisition firm, or SPAC, referred to as Seaport World Acquisition Corp. Inside days of the completion of the deal, Redbox shares traded for as a lot as $20; however the inventory received caught up within the late 2021 selloff of know-how shares, and ended the 12 months at $7.41. Apollo maintained majority management.

Redbox as a public firm was a guess that in a postpandemic world, film studios would launch extra movies to theaters, relatively than routing every thing by way of streaming providers—and that the corporate may use money circulation from the kiosk enterprise to broaden its digital choices. However the postmerger monetary efficiency missed expectations by a large margin. 

In a remarkably blunt February SEC filing, Redbox famous that leads to the 2021 fourth quarter had been damage by a smaller-than-expected variety of theatrical releases, and by the emergence of the Omicron variant of Covid-19.

“As such, Redbox leases haven’t recovered to the extent anticipated and…had been decrease than the fourth quarter of 2020,” the corporate stated within the submitting. “In help of its efforts to broaden its enterprise and remodel right into a multifaceted leisure firm, in the course of the fourth quarter of 2021 and into 2022, Redbox elevated its advertising and marketing and on-demand expenditures. Prices additionally elevated as Redbox bought extra content material. Throughout that interval, elevated prices haven’t been offset by a rise in revenues. Redbox’s enterprise has additionally skilled a rise in competitors from new and current rivals.” 

Redbox in that submitting added that it had maxed out its revolving credit score facility, and was chopping prices, delaying capital funding, and contemplating strategic alternate options. On the day Redbox made that disclosure, the inventory fell greater than 50%.

Greater than 74% of Redbox shares are managed by Apollo; one other 9%-plus is held by Seaport World Asset Administration, which had sponsored the SPAC. Each have dedicated to voting in favor of the pending deal. As soon as the vote is accomplished, the deal ought to shut as quickly as this week. And Redbox shareholders who grasp on are going to undergo the results.

Redbox didn’t instantly reply to a request for remark.

On Monday, Redbox shares are down 15%, to $4.28. They’ve loads additional to go.

Write to Eric J. Savitz at eric.savitz@barrons.com

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