From Penthouse to Ground Floor: The Penthouse Magazine Bankruptcy

Creative Destruction and an Inevitable Fall: What Can We Learn From the Penthouse Magazine Bankruptcy?

Penthouse International, publisher of Penthouse Magazine, sold for $11.2 million in June of 2018. 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, and what lessons can be learned regarding bankruptcy in general.

The New Owner

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 Auction

The Penthouse Magazine bankruptcy auction, advertised by DailyDAC, 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.

The Long & Winding Road

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.

However, times change. 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, 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.”

The Current Chapter 11

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 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. However, the court 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.

The 363 sale 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 (not uncommon in bankruptcy sales).

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 was 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:

• Administrative creditors are paid first. These are parties owed money for goods and services provided after the filing of the bankruptcy case. These parties include the Trustee, his attorneys and advisors, and attorneys and advisors employed by the official committee of unsecured creditors.
• Certain types of pre-bankruptcy unsecured claims are entitled to be paid next.
• All other pre-bankruptcy unsecured claims are the third level of priority.

 

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 that 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.

Other Interesting Tidbits from the Case

• The $3 million stalking horse bid was made by Dream Media, led by Adam Levin, CEO of Oreva Capital, an LA-based investment firm that bought cannabis-enthusiast magazine High Times.
• At least eight law firms went unpaid by Penthouse. These include Greenberg Traurig, which about $200,000; Bayard, P.A. (about $120,000); and Hogan Lovells (about $60,000).
• Axl Rose’s challenge to Bob Guccione, Jr., issued in the lyrics of a song on Guns ‘n’ Roses’ Use Your Illusion II’s album, was answered when Guccione Jr. sent a letter to Axl Rose accepting his challenge, leaving it up to the Rose to name the time, place and ring which would be gotten into. Axl never responded. This is all according to the Houston Press, which also noted that the reason Axl never responded is “in all likelihood after finding out Guccione Jr. had nine years of fight training.” DailyDAC researchers sought out evidence of such training, but to no avail. Nonetheless, the reader may be interested in this interview of Guccione Jr. in which he explains why Axl did not like him.

Lessons Learned from the Penthouse Magazine Bankruptcy

What does the Penthouse Magazine Bankruptcy teach us?

• That the hand of creative destruction is alive and well in all facets of the economy. “The death of a failed business should not be seen as a necessarily ‘bad’ outcome. Such failures merely manifest that great engine of the American economy, ‘creative destruction.’ In other words, business failure is merely one part (along with successful businesses) of good old-fashioned American capitalism built upon a foundation of efficient markets. Dying businesses are thus a natural part of a dynamic, capitalist economy.”¹
• That a senior secured position is generally a good position to be in.
• That “sin investing” may be worth looking at.
• Axl Rose is an interesting cat.

 

Perhaps it just tells us that porn sells, but internet porn sells better, and free internet porn makes selling other porn a tougher business.

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[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Opportunity Amidst Crisis – Buying Distressed Assets, Claims, and Securities for Fun & Profit; The Nuts & Bolts of a 363 Motion. This is an updated version of an article originally published on October 26, 2018.]

©All Rights Reserved. January, 2020.  DailyDAC^TM, LLC

1. See James H. M. Sprayregen, Jonathan Friedland, and Roger J. Higgins (2005), Chapter 11: Not Perfect, But Better Than the Alternatives, 14 J. Bank. L. &Prac.