What to Make of the Credit Cycle Part 12 (Long Yield, Baby, Yield).

The Rise of Litigation Finance

Investors have to generate yield somewhere. Hence, as we’ve discussed ad nauseum, the rise of alternative investment avenues such as venture capital and litigation finance. Wait. Litigation finance? Yes. Think Peter Thiel, Hulk Hogan and Gawker. This is a booming space.

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Gawker: The Gift That Keeps On Giving

The Latest in the Peter Thiel vs. Gawker Saga

Peter Thiel is fashioning himself like a Die Hard villain: impossible to put down. Right before Thanksgiving, Buzzfeed reported that Thiel had filed an objection in bankruptcy court alleging that he was boxed out from bidding on Gawker's assets. This makes for an interesting - if not circular - state of affairs.

First, a quick recap. Thief’s involvement in the Gawker matter is well known by now; his support of Hulk Hogan’s lawsuit against the digital media rag put the company (and its founder) in bankruptcy. Now the company is trying to maximize the value of the "estate" in an effort to return as much to claimants as possible. Hogan - with his massive judgment claim - happens to be a large claimant. 

In the objection filed on 11/22, Thiel argues that he could be the source of said maximized value; he would like to bid for the companies assets - including, interestingly, any and all claims that the plan administrator, Dacarba LLC, may be marketing to outsiders that could be pursued against Thiel himself. Which are, of course, assets of the estate (and were, to be clear, the bigger target of the objection). Like we said, this is a bit circular. Thiel backs Hogan. Hogan sues Gawker. Gawker goes bankrupt. Gawker's plan administrator and counsel seek to fulfill their fiduciary duties by maximizing value for the benefit of the estate and its creditors. Including claims against Thiel. Thiel seeks to buy the kit and caboodle (including claims). If he does, value goes to the estate and is used to pay…Hulk Hogan. Bankruptcy = awesome. 

The reactions to this circus were fast and furious:

  • Many articulated concern about Thiel’s nefarious intent: is he interested in a Big Brother-esque cleansing of Gawker and its archive from existence? 
  • Others clowned on Dacarba’s liberal reliance on Precedent Transaction Analysis and the $36mm “buy-it-now” price. We don’t, however, necessarily see an issue with it: aim high we say. After all, there isn't a tremendous amount of truly comparable precedent for well-known digital media URL addresses (and archives) being sold in bankruptcy (though we’re happy to be proven wrong). Test the market, we say. MAKE a market, we say. 
  • Regarding the marketing of claims against Thiel, the market is awash in new funds pursuing litigation finance strategies and looking for yield. It’s also, no doubt, awash in folks who would love to stick it to Thiel. So, why not go for that strategy? It actually demonstrates an awareness of the current litigation (and lit finance) environment.  

Is Digital Media in Trouble?

Don't Sleep on Digital Media "Distress"

Last week we announced that we'll be rolling out our Founding Member subscription program in early '18. The response was overwhelmingly positive with many of you reaching out and essentially saying "what took you so long." That warmed our heart: thank you! We look forward to educating and entertaining you well into the future. The timing fortuitously dovetails into a general narrative about the state of digital media today. 

For instance, is it fair to characterize Mashable as a distressed asset sale? Well, the company - once valued at $250mm - is reportedly being sold to Ziff Davis, the digital media arm of J2 Global Inc., for just $50mm. So, what happened? New capital for media companies has dried up (unless, apparently, you're Axios) amidst weakness in the ad-based business model. With Google ($GOOGL) and Facebook ($FB) dominating ads to the point where even Twitter ($TWTR) and Snapchat ($SNAP) are having trouble competing, digital media brands are feeling the heat. Bloomberg highlights that at least a half dozen online media companies - from Defy Media (Screen Junkies, Made Man, Smosh) to Uproxx Media (BroBible) - are also considering sales to bigger platforms. Indeed, in an apparent attempt to de-risk, Univision is ALREADY reportedly trying to offload a stake in the Gawker sites it recently bought out of bankruptcy.

Which is not to say that bigger platforms are killing it too: the Wall Street Journal reported earlier this week that both Buzzfeed and Vice will miss internal revenue targets this year. Oath, which is Yahoo and AOLbinned 560 people this week. Of course, those in the distressed space know that one's pain is another's gain. To point, Bloomberg quotes Bryan Goldberg, founder of Bustle, saying "Small and more challenged digital media companies have been hit hard. This is a time for companies with cash flow and capital to start acquiring the more challenged digital assets." That sounds like the mindset of a distressed investor: the buyside and sellside TMT (telecom/media/technology) bankers must be licking their chops. Back to restructuring, these sorts of mandates may be decent consolation prizes for those professionals not lucky enough to be involved with the imminent bankruptcies of (MUCH larger and obviously different) media companies like Cumulus Media ($CMLS) and iHeartMedia Inc. ($IHRT), both of which are coming close to bankruptcy (footnote: click the iHeartMedia link and tell us that that headline isn't dangerous in the age of 280-characters!). For instance, Mode Media is an example of a digital media property that failed last year despite at one time having a "unicorn" valuation (based on $250mm in funding), a near IPO, and tens of thousands of users. It sold for "an undisclosed sum" (read: for parts) in an assignment for the benefit of creditors. Scout Media Inc. filed for bankruptcy in December of last year and sold in bankruptcy to an affiliate of CBS Corporation for approximately $9.5mm. Not big deals, obviously, but there are assets to be gained there. And fees to be made. 

In response, (some) digital media brands are looking more and more to subscribers and less and less to advertisers in an effort to survive. Longreads' "Member Drive," for example, drummed up $140,760 which, crucially, it'll use to pay writers for quality long-form content. Ben Thompson has turned Stratechery into a money-making subscription-only service; he told readers that they're funding his curiosity and their education. Indeed, his piece this past week on Stitch Fix ($SFIX) may have, in fact, impacted sentiment on the company's S-1 and, in turn, the company's IPO price. These are only two of many examples but, suffice it to say, the "Subscription Economy" is on the rise

Which is all to say that our path is clear. And we look forward to having you along for the ride. Please tell your friends and colleagues to subscribe TODAY: existing subscribers will get a preferential rate.