Penthouse International, publisher of Penthouse Magazine, sold for $11.2 million in June. The company was worth about $700 million (adjusted for inflation) at its height. The latest Penthouse Magazine bankruptcy highlights just how far Penthouse has fallen.
The buyer was WGCZ, which also owns XVideos.com and Bangbros.com. XVideos, in turn, functions as an aggregator (just as YouTube is an aggregator of non-porn video content) while Bangbros owns more than 40 porn websites. WGCZ’s properties include two of the top 15 traveled websites in the world.
The winning bid by WGCZ exceeded the $3 million stalking-horse bid, to be sure, but nonetheless represented a nearly unbelievable fall from grace for the company that catapulted Bob Guccione onto the Forbes 400 List by 1982.
The Penthouse Magazine bankruptcy auction, advertised by DailyDAC here, garnered the interest of a number of bidders including Pornhub (owned by MindGeek) and Hustler. The high level of interest was no surprise, though the low price the assets ultimately garnered was, given that they included 2,000 trademarks and copyrights, a 1,200+ film library, and licensing agreements producing significant income.
Penthouse Magazine was launched in 1965 and had nearly 5 million subscribers by 1979. It came to feature writers like Isaac Asimov, Alan Dershowitz, Stephen King, Philip Roth, and Gore Vidal. Its photo spreads included iconic figures such as Madonna and Vanessa Williams. By 1986, Guccione’s General Media published not only Penthouse but also 15 other magazines.
Times change, however, and by 2002 Penthouse was down to 530,000 subscribers. General Media filed chapter 11 the next year. Penthouse’s assets were sold in the chapter 11 case to Globix Corporation founder Marc Bell and investor Daniel Staton. They formed Penthouse Media to own the company.
FriendFinder later purchased Penthouse Media from Bell and Staton but that company ultimately filed chapter 11 in 2013.
Kelly Holland, through her newly-formed Penthouse Global Media, purchased Penthouse out of chapter 11 in 2016. Her ownership was fairly short-lived, however, with a third chapter 11 being filed in January 2018. Although hindsight is 20-20, the Penthouse Magazine bankruptcy was foreseeable. Hamid Rafatjoo of Raines Feldman, counsel to the official committee of unsecured creditors, told DailyDAC “[t]he amount of the secured debt and credit card caliber interest rate being charged on it was an anchor around Penthouse Global Media’s neck. In my opinion, it was never a question of if Penthouse would need to file it was a question of when.”
This latest chapter 11, through which the sale to WGCZ was effected, was necessitated by the company’s inability to pay the loan Penthouse Global Media received from ExWork Capital to finance the purchase. That debt was later sold by ExWork to Dream Media and Dream Media had sought the appointment of a receiver.
The immediate cause of chapter 11 was the threat of a receiver; the company filed bankruptcy to prevent that from happening. The court, however, ordered the appointment of a trustee, David K. Gottlieb, to take over the administration of the case on March 2nd. The appointment of a chapter 11 trustee is nearly tantamount to the appointment of a receiver.
[Editor’s Note: To learn more about chapter 11 trustee, read Ousting the Debtor in Possession: The Good, the Bad and the Ugly of Replacing a Debtor’s Management with a Chapter 11 Trustee.]
The 363 sale, as noted above, occurred in June (the auction was June 4th; the results of the auction were approved by the Court on June 14th, and the sale was consummated on June 15th). Technically, WGCZ was not the purchaser, as it assigned its right under the purchase agreement to several affiliates (which is not uncommon in bankruptcy sales).
[Editor’s Note: Sales in bankruptcy are commonly referred to as “363 sales” because Bankruptcy Code §363 is the section that primarily governs sales of assets out of a debtor’s ordinary course of business. Check out DailyDAC’s definition of 363 sales to understand more about them.]
Following the sale, Dream Media was paid $9.710 million on account of its secured claims and the Trustee received $1.8 million for the benefit of the bankruptcy estate, each pursuant to a settlement agreement that had reached and approved earlier in the case.
The $1.8 million earmarked for the “bankruptcy estate” is, as in all chapter 11 cases, subject to a “priority” of distribution outlined in the Bankruptcy Code:
[Editor’s Note: read a more thorough description of the Bankruptcy Code’s priority scheme in Dealing With Distress For Fun & Profit – Installment #13 – The Priority Scheme of Bankruptcy and in Absolute Priority Rule in Bankruptcy – Are You Atop the List?]
The claims owed to these groups exceed the $1.8 million currently available by an exponential factor. But the $1.8 million to can grow (or shrink). It is commonplace in chapter 11 cases, the bankruptcy estate may bring various lawsuits against third parties under a variety of legal theories. Administrative claims may increase to do this, leaving less for potential distribution to unsecured creditors. But successful lawsuits can dramatically increase their ultimate recovery.
What does the Penthouse Magazine Bankruptcy teach us?
Perhaps it just tells us that porn sells but video and internet porn sells better and that free internet porn makes selling other porn a tougher business.
Michele has been a director with Financial Poise since 2012. View her LinkedIn profile here: https://www.linkedin.com/in/michele-schechter-46b9824a/
Personal Property Appraisals 101
90 Second Lesson: Why Would a Debtor Choose to Liquidate Under Chapter 11?
LLC Membership Interests in Chapter 11 – Can They be Sold Over Other Members’ Objections?
Section 363 Sale: Free and Clear of Claims That Are Backed By Strong Public Policies
Not Necessarily Free and Clear I: Purchasing Real Estate Property in a Section 363 Sale
90 Second Lesson: To Stalk or Not to Stalk? Why be a Stalking Horse Bidder?
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