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Private equity firms have long been unable to stomach hefty investments in new entertainment companies. But Blackstone’s big bet on Kevin Mayer and Tom Staggs’ Candle Media is testing whether the money gushing into streaming can change all of that.

wo years ago, Joe Baratta couldn’t figure out what Blackstone, the private equity giant he worked for, should do for its next move in media and entertainment.

The big TV companies, such as ViacomCBS and Discovery, were bleeding viewers as people cut the cord to cable television and streaming powerhouses like Netflix grew ever bigger. “We were trying to figure out whether any of these assets were investable,” said Baratta, global head of private equity at Blackstone, referring to media companies.

Then, in the fall of 2020, Baratta huddled with Kevin Mayer, a longtime Disney executive who had just left TikTok as CEO of the social media app. At first, Blackstone executives discussed the idea of Mayer consulting with the firm or managing one of its existing portfolio companies. But Mayer and a former Disney colleague, Tom Staggs, had a different pitch: Would Blackstone back a brand-new media company they were forming that would tap into the gusher of money going into streaming?

THE TAKEAWAY

• Blackstone aims to take Candle Media public in next two years

• Company eyeing gaming, social media and commerce

• Candle has discussed buying ATTN, Imagine Entertainment

By snapping up independent film and TV studios, Mayer and Staggs planned to sell content to all the major streaming services, while also generating revenue through commerce. A Zoom call between Mayer and Stephen Schwarzman, Blackstone’s CEO, to discuss the vision for the company was supposed to be 30 minutes, Mayer said in an interview. It ended up lasting around three hours.

Last summer, Blackstone agreed to back the pair and so far has contributed just under $2 billion in cash, according to people familiar with the situation. Since last summer, Mayer and Staggs have used that war chest, along with equity and debt, to make around $4 billion worth of acquisitions.

Earlier this week, the company revealed its name, Candle Media, when it announced that it had bought a minority stake in Will Smith and Jada Pinkett Smith’s Westbrook Inc., an entertainment company that produced the recent movie “King Richard.” Candle Media spent around $60 million to buy an 11% stake in the business, according to a person familiar with the situation.

“If you look across the whole media landscape, the intersection of growth and scale is a tricky one because there are a lot of very large off trends in the media business with cord cutting,” said David Kestnbaum, a senior managing director at Blackstone who heads up its media practice. Instead, he told The Information in an exclusive interview, Blackstone is looking at “how do we make multiples of our money in something that is dramatically very on trend.”

More deals are on the way. The company is looking at smaller acquisitions in gaming, commerce and social media as well as content companies outside the U.S., Baratta said.

Candle Media has discussed buying digital media company ATTN, which makes video clips promoting social causes, along with Ron Howard and Brian Grazer’s Imagine Entertainment and Mythical Entertainment, led by the YouTube creators known as Rhett & Link, said people familiar with the situation.

Blackstone aims to take Candle Media public in the next couple of years and believes it could someday be worth between $20 billion and $30 billion, according to a person familiar with the situation.

“There is no scaled, born-for-this-generation content-creation and commerce company, and we think we can create that,” Baratta said.

The new venture is a test of whether private equity can finally find a reliable way to hit it big in Hollywood. Private equity firms haven’t been afraid to buy up lower-risk media assets that produce sizable, steady streams of cash, even if they’re not growing much. Newspapers and broadcast TV and radio stations are popular targets, though private equity firms have been criticized for mercilessly cutting costs to squeeze more profits out of them.

And like its peers, Blackstone has bought its way into another consistent entertainment moneymaker: music publishing. A few years ago it acquired Sesac, which owns the rights to songs by Bob Dylan, Neil Diamond and Mariah Carey.

But private equity firms have only dabbled in the content-creation business through smaller investments, rarely placing big bets on new entertainment companies like the one Blackstone is making with Candle Media. With good reason: Hollywood is a cruel place where investors’ dreams go to die on the red carpet. It’s a high-risk, hits-driven business where the only sure things have traditionally been based on superhero, animation and other blockbuster intellectual properties already locked up by the giant studios.

The current golden age of streaming might be changing that—or at least that’s Blackstone’s bet. Netflix, Amazon, Apple TV+, HBO Max and other streaming heavyweights are creating a gold rush for content to fill their service’s home screens with movies and shows.

Baratta sees a big opportunity for Candle Media to create a stable revenue stream by simply earning fees to make shows for the streaming services. That’s what Hello Sunshine—the production company founded by actor Reese Witherspoon that Candle bought for roughly $900 million—did in the case of “The Morning Show,” a hit series that Apple TV+ distributes and owns. It’s a much less risky proposition than spending tens or hundreds of millions of dollars on a project that may or may not take flight.

“The number of productions that have to be made every year, year in and year out, is at a different scale than it was 10 years ago,” Baratta said. “We think we can have a really successful business just manufacturing content even if we don’t own it…that is a recurring revenue stream in a way that it wasn’t 10 years ago.”

Still, the really giant paydays in entertainment tend to come when companies own their own content, so Candle Media plans to do that too. Moonbug Entertainment—a children’s entertainment company that is Candle Media’s biggest acquisition so far at $3 billion—owns its shows, including its popular series “CoComelon,” which it licenses to Netflix. With Blackstone’s backing, Hello Sunshine plans to retain ownership of more of the shows and movies it makes—licensing them to streaming services for a period of time.

Owning its shows and movies will enable Candle to resell the rights to other services around the globe and make more money—particularly if the shows are hits. However, such an approach is risky since it means the projects have to be wildly popular to be profitable.

But Candle may have a hard time retaining ownership of more of its shows and movies, as streaming companies like Netflix and Amazon will push back on that unless the projects are things they feel they can’t live without, said Evan Shapiro, a former producer who consults with entertainment companies.

“Who is making a deal with Hello Sunshine that is going to allow them to own their content?” he asks.

Focusing on high-end premium content makes sense given the demand for it, but Mayer and Staggs should focus more on newer, creator-economy projects that they can own, he said. “It feels a little old Hollywood to me,” Shapiro said of the company’s current focus.

Commerce, too, is a big buzzword in Candle Media’s vocabulary, as it is for other media businesses looking for novel sources of revenue. For example, the company is discussing ways to build a commerce business around Witherspoon’s popular book club. Selling stuffed animals drawn from London-based Moonbug characters is another possibility.

“We are a content incubation and packaging business and we are going to own some of it and we are going to spend some money on some of it and then we are going to create an e-commerce ecosystem around the content we own,” said Baratta.

Ultimately, Blackstone’s gamble on Candle Media is a bet on Mayer and Staggs, two of the most experienced executives in entertainment. Both were contenders for the CEO spot at Disney and were architects of the entertainment giant’s acquisitions of Lucasfilm, Pixar and Marvel. But even with Blackstone’s deep pockets behind it, Candle Media won’t have the vast resources of Disney, which can make money off its intellectual properties through theme parks and merchandise, not just through shows and movies.

“Knowing which projects to own to take a risk on is a seasoned judgment,” said Mayer.

Connecting Creators

For Mayer, 59, the new venture is a comeback from an aborted detour into the tech industry at TikTok. He lasted only four months at the social media app, leaving in August 2020 after the Trump administration pressured the company to sell its U.S. operations due to TikTok’s ties to China. The Biden administration backed off from the threats against the app, which Chinese internet powerhouse ByteDance owns.

Mayer immediately started plotting his next move, including the possibility of raising a fund for a private equity firm. One of the people he met with during that time—Joe Ravitch, co-founder of boutique investment bank The Raine Group—talked him out of the idea, telling Mayer he would need to raise multiple funds before he would start making real money.

Instead, Ravitch suggested Mayer build his own company by acquiring other entertainment businesses. Mayer liked the idea, and Raine drew up a business plan for him.

At the same time, Mayer was talking to Staggs, 61, who resigned from Disney as chief operating officer in 2016 when he was passed over as CEO, about reuniting. Staggs joined the new venture, and the duo, along with Raine, began meeting private equity firms about investing in the company.

Blackstone’s Baratta and Mayer had chatted about the challenges in the media business even before Mayer had joined TikTok. When they met again in 2020 to talk about the new company, Blackstone executives liked Mayer’s idea of investing in content, said Baratta. His vision for Candle Media was to allow the heads of the businesses it acquired to continue operating independently, which many of them find appealing, Baratta said.

“We want to invest in where the world is going,” he said. “Obviously, content is in high demand and it will stay.”

After teaming up with Blackstone, Mayer and Staggs’ company began talking to Hello Sunshine, which Witherspoon founded as a way to showcase storytelling about women, about an acquisition.

Mayer knew Sarah Harden, CEO of Hello Sunshine, for more than 15 years from working together in the entertainment business. Witherspoon, for her part, reached out to Whitney Wolfe Herd, co-founder and CEO of dating site Bumble, to learn more about what the Blackstone team was like to work with, according to a person familiar with the situation (Blackstone was an investor in Bumble).

Candle Media announced the Hello Sunshine acquisition in August. While the deal valued the company at around $900 million, Blackstone contributed around $700 million in cash upfront to finance the deal, according to a person familiar with the situation. It beat out KKR, Carlyle and other rival private equity firms for the deal, according to other people familiar with the situation.

The valuation on Hello Sunshine was steep, translating to more than seven times the entertainment company’s expected revenue for 2021. That is a big premium over where large entertainment companies like Lionsgate and ViacomCBS were trading last year, at around 1.5 times 2021’s expected revenue.

The hefty premium sparked a rush by production studios—especially ones backed by celebrities—to seek investments or sales at high valuations. Mayer and Staggs held discussions with LeBron James’ production company, SpringHill Company, about a deal, but nothing came of it, said people familiar with the situation. RedBird Capital Partners ended up leading an investment in SpringHill.

Mayer’s connections helped again in the Moonbug deal. The company—which has one of the most popular shows on Netflix with “CoComelon”—has held discussions with other potential bidders, including Comcast and KKR, according to people familiar with the situation. Rene Rechtman, CEO and co-founder of Moonbug, knew Mayer from when Rechtman was head of international at Maker Studios, which Disney bought in 2014. Initially, Rechtman told Mayer his plan was to take Moonbug public, according to a person familiar with the situation.

But Mayer and Rechtman stayed in touch. Eventually, the combination of Blackstone’s backing for Candle Media, the involvement of Mayer and Staggs and the freedom they promised for Moonbug won him over.

“If you sell to a strategic, you become part of their business, but now we are still ourselves,” said Rechtman, who lives in London with his family. “I told the board, ‘You already invested in me, but now you get me, Kevin and Tom.’”

And at the end of last year, Candle Media also acquired Faraway Road Productions, the Israeli studio behind “Fauda,” a popular Israeli political thriller that runs on Netflix, according to people familiar with the situation.

Candle Media, naturally, has ideas about new things to do with its shiny new entertainment assets. For example, it plans to explore ways for Moonbug and Hello Sunshine to work together, Staggs said. But he stresses that Candle Media won’t meddle in the creative process.

“At Disney, part of our job was making sure the creative organizations were positioned to succeed and not get overly bogged down by corporate,” he said. “We aren’t doing this to be auteurs—we don’t want to read 100 scripts and tell people what to make.”

The success of Candle Media may rest partly on how good Mayer is at juggling an increasingly full dance card. He is also chair of Dazn, billionaire Len Blavatnik’s streaming sports service, and is consulting with Discovery CEO David Zaslav on that company’s acquisition of WarnerMedia—a deal that is supposed to close later this year.

Blackstone’s Baratta, for one, isn’t concerned about Mayer getting distracted from Candle Media, noting that Mayer was upfront about his other commitments in his discussions with Blackstone. He believes Mayer’s other work will give him better insight into how Candle Media can grow.

Mayer, for his part, said he wore many more hats in his last job at Disney, when he ran everything from streaming services to advertising sales, than he does now.

“I had like 16 jobs,” he said.