A success story that suddenly turned into a nightmare depicts the rise and fall of Vice Media, while defining the limits that Wall Street’s integration course imposes on the creative industries, as liquidity can suddenly go from a boon to a noose around the neck.
Vice: From Pulitzer to Bankruptcy and Foreclosure
As the Financial Times reports, for years Vice was widely seen as the future of media. Capturing a stunning upward trajectory, private equity investor Vice Media’s injection of around half a billion dollars in 2017 through private equity firm TPG appeared to be leading the way on Wall Street – with company co-founder Shane Smith to “round up” Vice’s valuation from $5.7 billion to $7 billion.
What followed was a total disaster: “After a series of disappointing results, years of chaotic management, risky businesses and a liquidity crisis, Vice filed for bankruptcy. TPG’s $450 million bet was called off. Vice’s total valuation is less than $300 million,” the financial document describes.
Vice’s collapse seems to be making headlines at the end of an era when mainstream media and investors have poured billions into news startups like BuzzFeed, Vox Media and Group Nine, hoping to win millennials – and increase ad revenue. That media momentum had reached Rupert Murdoch, who in 2012 – as the FT describes it – drank tequila with the bearded, tattooed Smith at Vice’s Brooklyn office. It’s a consequence of Wall Street’s conflict with a creative industry “that housed big personalities and big egos.”
But since Vice isn’t the first media industry to crash after a private equity investment, many are turning to companies like TPG, a Texas-based company that focuses on leveraged buyouts and equity capital. growth. The company denies the charges, attributing Vice’s collapse to “operating losses” and the company’s inability to “pay a debt separate from TPG’s investment”.
Vice’s story began about 30 years ago in Montreal, Canada, where it was launched as a counterculture magazine. As the FT reports, its initial audience of a few thousand Canadians turned to Vice for its subversive stories about music, fashion, drugs and sex – topics that have remained central to its subject matter.
In 1999, Smith moved his operation to New York and befriended director Spike Jonze and media executive Tom Freston. With their encouragement, Vice expanded into online video, which grew rapidly in the 2010s.
The outlet became known for mixing subjects such as sending a journalist who had taken LSD and attended the Westminster dog show, with award-winning documentaries on the Islamic State in Iraq and Syria.
In the boom years, all the major media admired Vice. Fox and Disney respectively invested $70 million and $200 million. The cash allowed Smith to take the next step in 2015, creating a cable station for millennials: Viceland, which quickly expanded to dozens of countries through a series of joint ventures.
This is where TPG came in. After funding companies about to go public and looking for a final injection of cash, the company has backed Uber, Airbnb and Spotify.
But, as the FT notes, these investments come with conditions designed to protect the interests of the investor. The money from TPG and Sixth Street came in the form of preferred stock, not common stock. Preferred shares paid a 12% dividend in the form of additional shares and junior debt in lieu of cash and had other rights to priority payment. All of this contributed to a “complex and restrictive share structure,” according to the bankruptcy filing. This investment, however, left room for higher priority loans that Vice would accept in the years to come.
At the time, however, what caused a stir was Vice’s impressive $5.7 billion valuation – more than double the New York Times valuation and 22 times what Jeff Bezos paid for it. the Washington Post in 2013.
The beastly valuation, however, put the “cart before the horse”: the strategy now had to be built to meet the $5.7 billion valuation.
However, notes the British publication, “the 2017 valuation was something of an illusion. A person familiar with the company’s finance notes that while the TPG preferred stock investment valued Vice in total at $5.7 billion, such a figure was largely made up for marketing purposes.
“In contrast, the key figure at the time was the preferred stock ‘liquidation preference’ of 1.8 times. This meant that in the event of bankruptcy, TPG and Sixth Street were entitled to receive $810 million – their initial investment of $450 million multiplied by 1.8 – before any other shareholder at the time could receive any proceeds.
The first upheavals
TPG’s entry began to cause the first cracks in Vice’s disruptive empire.
Viceland, which Smith promised would “bring millennials back to television”, failed, attracting little viewership – despite the company still being hailed for its journalism.
But Smith’s management team, as well as Vice’s investors and staff, were growing impatient. “People were angry because they hadn’t gotten rich like Shane promised,” said a former top executive.
In the end, Viceland became Vice’s fatal mistake. The huge start-up costs of television stations weighed on its finances, while online advertising slowed. 2017 revenue targets “missed” by $100 million.
And things got even worse: just before Christmas that year, the New York Times published a report alleging widespread sexual abuse at the company. Vice’s irreverent style, once an asset, turned into a drag. Former executives describe this moment as a turning point, after which the company found itself in “utter chaos”.
Who is to blame?
In light of all this, some investors are blaming TPG for Vice’s downfall. “Private equity does this: it gives you a high valuation. But the paper they give you is like a noose around your neck, which gets tighter the more liquidity falls below expectations,” says a longtime shareholder.
Other investors told Vice that TPG’s capital structure fosters an adversarial atmosphere because TPG’s privileged position gives it different incentives for notional stakeholders.
Others, however, react to this approach. They feel that this type of business is struggling to have a continuous upward trajectory anyway. Some argue that constant mismanagement has caused Vice to spend $1 billion in recent years.
People close to TPG reject the claim that the terms of its financing were too onerous, noting that it never took interest or cash dividend distributions, while the company continued to inject money. money in Vice after the original 2017 preferred stock deal.
By 2018, the downward spiral had begun: the first staff cuts were a fact – although investors continued to pour in capital. In 2022, TPG and Sixth Street took control of Vice’s board of directors, hoping to sell the company for $1.5 billion or recoup hundreds of millions for various elements of the business. Board meetings began to resemble shareholder meetings, with discussions centering on the sale of the business rather than operations or strategy, according to people who attended the meetings.
As the FT notes, the selling process coincided with a market readjustment for media and tech companies and a slowdown in the advertising market. As the Federal Reserve raised interest rates, Wall Street bailed out unprofitable or marginally profitable companies.
In the hands of the fortress
With the company in crisis, Vice Media’s most significant funding happened to be a $250 million senior secured loan led by another hard-core fund, Fortress Investment Group, in 2019. Maturity of this loan at the end of 2022, as well as priority ranking in Vice’s capital stack, put Fortress in a position to take control of a revamped Vice Media.
That’s exactly what happened last week, as Vice filed for bankruptcy, with Fortress reaching a preliminary agreement to swap $225 million in debt for ownership of the company.
The next day
As the British newspaper notes, the collapse of the brash media empire is a humbling moment for Smith, which Fortress now plans to keep to some degree. According to the FT, Fortress executives praise Vice’s studio and TV news units, as well as advertising agency Virtue. They are less enthusiastic about Vice’s online publishing business, which they will seek to cut costs. But Fortress has no plans to shut down Vice News, FT sources say.
Vice insiders and investors are hoping another bidder will step in. They believe the bankruptcy process will free Vice from the maze of financial obligations and thus emerge a leaner and more attractive company for buyers.