A Genius plan for Miramax's founders
Wall Street's starting to buzz over Bob and Harvey Weinstein's interest in a small home video distributor.
NEW YORK (Fortune) -- Normally, we don't trouble ourselves much with companies sporting mere $110-million market capitalizations, but then again neither do most of the people involved with the modestly named Genius Products Inc.
Genius is a curious little venture whose main business is the home video distribution of The Weinstein Company, the closely watched multimedia endeavor started by eponymous brothers Bob and Harvey of Miramax fame after they divorced from Walt Disney Co. (Charts, Fortune 500) two years ago.
Compared to their former Oscar-laden company, the Weinsteins have had a bumpy time creating major box office hits in their first year as an independent media company, which among other things has branched into video games, fashion and social networking. Now, however, there is considerable rumbling that the little-noticed Genius could help the brothers move their business into its next act.
Depending on which rumor you hear, Genius is either a potential source of needed cash for the Weinstein's ambitious efforts, or a vehicle through which the Weinstein Company will one day soon take itself public, either by buying out the 30% of Genius's parent it doesn't own, or through a reverse listing via Genius.
Part of the commotion around Genius is that the thinly traded over-the-counter stock is expected to list on the Nasdaq exchange as soon as next month. Shares of Genius (Charts) closed Friday at $1.63.
David Bank, an analyst who follows entertainment companies for RBC Capital Markets, said he doubts that the Weinsteins will use Genius to take themselves public, but he does think they will find a way to rework the convoluted structure through which they hold control of Genius. Despite the public company's pipsqueak size, he said: "I'm covering it because this company's going to be a much bigger company in some way, shape or form."
Indeed, Steve Bannon, Genius's chairman, said in an interview that the company is getting attention because its overall business has grown from a mere $32 million in revenues last year to sales of around $800 million this year that will top $1 billion by next year.
Whatever happens next, Genius is already a somewhat mind-bending meld of high finance and Hollywood chutzpah. The company has a checkered past in the pink sheets and was essentially a shell when Bannon took it over in 2004 with Trevor Drinkwater, a former Warner Brothers home video executive who serves as its CEO.
Their idea was that there was money to be made as independent distributors of home video and that their industry expertise would give them a leg up on the in-house distribution capabilities of the big studios.
Although the DVD business has flattened out, Bannon and Drinkwater believe there's still plenty of money to be made as consumers buy more flat screens and HD players and the gap between theater and home video release dates shrinks.
The hitch behind the Genius idea was a lack of product to distribute.
Bannon, a one-time Goldman Sachs media banker, bought a small film library and then caught wind that the Wall Street powerhouse was raising $1.2 billion for the Weinstein startup in 2005. He and Drinkwater pitched his old firm and the Weinsteins to enlist Genius as their home video distributor rather than one of the majors.
Bannon cut them the industry's best deal -- a 5% royalty paid to Genius versus a typical rate of more than double that. Perhaps best of all, the Weinsteins were given a 70% stake in Genius as part of the bargain. For tax-saving reasons, the venture was structured such that the publicly traded Genius Products Inc. actually only represents the 30% of parent Genius Products LLC that the Weinstein Company does not own.
Bannon is now telling minority shareholders he wants to simplify the structure and improve liquidity and make the company more alluring to Wall Street. Investors are betting that he'd also like to renegotiate his sweetheart distribution deal with the Weinsteins.
Bannon declined to comment on specifics, but here's how it could work:
If the Weinstein Company were to convert its stake in the LLC for common stock in the publicly traded entity, it would instantly have a market value of closer to $350 million, and the Weinsteins' would own $250 million of that. By paying a higher royalty to Genius for distribution, the Weinstein Company would theoretically fuel the public company's earnings and stock price from which the Weinsteins -- as largest shareholder -- would most benefit. Indeed, in May, the stock was nearly double where it stands today, meaning that on paper that imputed value of the Weinstein stake was worth close to $500 million.
Part of the recent falloff in Genius stock is just the reality of being a microcap stock that trades only a couple of hundred thousand shares trade a day. That, plus the mixed track record of Weinstein releases so far this year, general Hollywood jitters, and, according to Bank, questions about whether Genius can grow as quickly as previously thought.
The company has pursued its strategy of using its anchor tenant to build relationships with the big box retailers and Blockbuster that account for the lion's share of home video sales, while attracting new distribution partners including Sesame Street, ESPN, and World Wrestling Entertainment. To supplement its thin margins as a distributor, it is taking part-ownership in some of the straight-to-DVD films it is putting on shelves.
Larry Madden, the Weinstein Company's chief financial officer and one of its appointees on the Genius board, told me last week that Genius has performed "beyond our wildest hopes" given that the Weinsteins took a chance on an unproven entity while getting their own venture off the ground. "First and foremost we are absolutely thrilled with the relationship; we're thrilled with their performance."
As far as the rumors -- which he called persistent and "annoying"-- Madden said he wouldn't comment on them specifically. But he also indicated that changing any aspect of the Genius relationship was not something in the works.
"This is a long term play for us. The structure is definitely complicated. We'll always consider restructuring or making it better for everyone if that makes sense. Do I feel I need to restructure it? No, I think it works fine."
That said, Madden went on to say the Weinstein Company would consider anything that works best for both the parent and its subsidiary, and would keep its options open. Needless too say, it's nice -- if complicated -- having a Genius in the family.