Initial Penthouse Offering, Take Two: Go Public or Go Bust

Before he got into the adult business Marc Bell was perceived as a financial wunderkind. But the adult industry makes a lot of people stupid.

from – FriendFinder Network needs money … fast. But, this is nothing new. The weight of hundreds of millions of dollars of short-term debt and no way to repay it has prompted the company formerly known as Penthouse Media Group to turn to the public capital markets for the help it needs. It’s a desperate move, as FFN learned a year ago when it made the same announcement under the same circumstances. Likely, the results will be the same as well. FFN didn’t go public last year, and 2010 probably won’t be any different.

Same Ol’ Situation

“It’s the same old situation … It’s the same old ball and chain.”

The Mötley Crüe lyrics pumped into gentlemen’s clubs around the U.S., inspiring dancers to peel away their skin-tight togs to the delight of dollar bill-wielding bachelor partiers, offer an apt description of this latest attempt by FFN to go public.

FFN, which is not profitable, has a mere $32 million in cash on hand and $650 million in liabilities, according to Crain’s New York. Of that, $44.5 million comes due on July 31, 2010, and the company is already saying that it will run into a “material deficiency in our short-term liquidity” if it can’t restructure. To make matters worse, the company has a negative net worth of $118 million. It’s not a pretty picture for investors, which makes it appear that this strategy probably won’t work.

When I saw the financials and the IPO plans, I thought I was looking at news that was a year old; it wasn’t until I saw the liability amount that I realized this was a fresh attempt (Warning: NSFW). Almost exactly a year ago, Penthouse changed its name to FFN and announced that it was looking for equity capital. At the time, the company had $691 million in liabilities, according to the S-1 it had filed in December 2008, $411 million of which had been reclassified from long-term to short-term because of the company’s “failure to comply with certain covenants and restrictions in the agreements governing our 2005 Notes and 2006 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and for which waivers had not been obtained.”

This left FFN with $420.1 million that was due immediately and only $43.3 million in cash on hand. The company sought to go public in an attempt to remedy its incredible short-term debt load and lack of access to the resources to repay. Even the $59 million in interest payments that FFN had paid in the first nine months of 2008 were intimidating when weighed against the small amount of cash the company had on hand.

Of course, FFN didn’t go public — but you probably figured that out already. The notion of floating an IPO on the New York Stock Exchange at this time last year was nothing short of absurd, especially for a company in FFN’s situation.

But it seems that over the past 12 months, FFN found a way to buy time; otherwise it wouldn’t be in its current situation — it would have just gone out of business. Instead, a year has passed, and nothing has changed: It’s still around, it’s still in financial trouble, and it’s now ready to attempt the identical maneuver it failed at last winter in the hopes of attaining a different outcome.

Same Ol’ Ball and Chain

The chain on FFN’s ankle in 2010 is the same one that Penthouse bore over a year ago. In 2007, Penthouse acquired Various. You’ve probably never heard of Various, but its portfolio companies are rather well known:, and countless other dating sites, both mainstream and adult. The deal was mind-blowing: Penthouse, which had estimated annual revenues of only $50 million, spent $401 million on Various.

Feelings about the deal in the adult entertainment industry were mixed. Many were optimistic, hoping that the acquisition would signal an opportunity for the industry to break into mainstream finance, showing a maturity that long eluded the skin business. But the zeal was tempered with concern: Nobody could figure out the transaction. Penthouse was universally judged to have overpaid for Various, and the dollars involved left people perplexed. It was clear that outside capital had been pumped into Penthouse to make the acquisition possible, but there didn’t seem to be much value to the approach beyond the opacity afforded by the ailing adult media company.

Skeptics were right; the acquisition didn’t make any sense. True, Penthouse did need to beef up its online presence, where it was virtually nonexistent in 2007, and buying Various was a great way to do that. Also, its revenues were in the tank, and Penthouse CEO Marc Bell [pictured] and his investors obviously needed a way to turn the situation around. Leverage was easy to secure at the time, so pumping more money into Penthouse so it could buy its way out of trouble by acquiring Various probably didn’t seem too crazy when the transaction occurred.

For a while, the acquisition was celebrated, because Bell could easily control the flow of information from his private conglomerate. But the situation eventually deteriorated to the point where honesty was the only viable policy. The heavily leveraged transaction had left Bell and his investors with interest payments that were bleeding the company dry, and the damage done to credit markets and consumers by the September 2008 financial meltdown took the Penthouse’s future from implausible to impossible.

By the end of 2008, there was no hope for Penthouse. It had blown through its loan covenants and needed to come up with more than $400 million on short notice. Credit markets were no longer an option, and FFN’s existing investors were ostensibly unwilling to double down on the company. The only choice it had was to go public. So Penthouse changed its name, drawing on the brand value of the most popular company in the Various portfolio, while also downplaying the adult entertainment aspect of the company’s operation in hopes of making potential investors more comfortable.

It didn’t work. FFN was unable to make the plunge, but it found a way to limp along for the year that followed.

FFN’s latest attempt to go public is a transparent gamble. In addition to the attempt to push through a short-term credit debacle with an equity issue, it’s trying to go public on the NYSE, despite the fact that it doesn’t meet the criteria yet. According to a report in Crain’s New York, a company must have a minimum of $75 million on hand, a market value of $150 million and $50 million in shareholder equity to join the NYSE party. If FFN is able to raise the $200 million it’s shooting for, reaching those minimums would be no problem. But that would require a successful IPO, which is far from assured.

It’s 2010, and it’s really just the same ol’ situation for this ailing company.

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