Toronto private equity firm Catalyst Capital Group Inc. scooped up Cirque du Soleil’s debt this past spring at barely half its face value. Now, it’s betting it can restore the famed circus troupe to its past glory by imposing greater financial discipline and bringing its live entertainment to your screens at home.
A Quebec Superior Court on Thursday confirmed that an offer by Catalyst and a group of roughly 15 other senior creditors is the designated bid for the sale of the company and its emergence from bankruptcy protection after no other bids materialized. The lenders are buying Cirque in a transaction valued at about US$1.2-billion, including a US$375-million injection of new money available when the deal closes and the elimination of about US$900-million of debt. In exchange, the lenders will receive 100 per cent of the equity of Cirque.
At first glance, it’s an anti-climactic end to a saga that Cirque founder Guy Laliberté predicted would be a “battle royale” for control of the entertainment giant. But a drama did play out behind the scenes – one Catalyst says tested the creditors’ resolve as Cirque’s former owners manoeuvred against them to try to keep control of the company.
“We’re pretty excited about the future,” Catalyst managing director and partner Gabriel de Alba said in an interview with The Globe and Mail, in which he discussed the sale dynamics and how Cirque’s owners are thinking about the potential for their investment. “What we bring is … a fresh set of eyes to challenge the historical thinking and come up with more optimal ways to run the business while still protecting the creative core from Quebec.”
Cirque filed for creditor protection on June 30 in Canada and shortly afterward in the United States as a stretched balance sheet finally snapped after revenue fell to nearly zero in the spring. The company, which depends on big crowds paying often big sums to watch its acrobatic live shows, shut down 44 productions and laid off 4,679 employees on March 19 to comply with government-mandated bans on public gatherings.
Recapitalizing Cirque gives the company the leeway to move through the pandemic and emerge reinvigorated while bringing employees back, according to Mr. de Alba. He said Cirque will focus first on reopening its permanent shows in Las Vegas. The company counts on a partnership with casino operator MGM Resorts for about 35 per cent of its US$950-million annual revenue, according to a Moody’s Investors Service estimate.
But Catalyst is looking beyond Cirque’s traditional model of selling tickets for live performances. A big part of the new ownership’s plans for the circus troupe involves monetizing its unique brand of entertainment by delivering it into the home digitally.
“You’ve seen that Disney is bringing some theatrical shows to [its subscription-based, video-on-demand service] Disney+, like Hamilton, with great success,” Mr. de Alba said. “I foresee that Cirque shows can also be part of these types of streaming platforms.”
Cirque will also partner with industry leaders working on non-scripted entertainment, Mr. de Alba said. Examples of such reality shows that have had commercial success are NBC’s America’s Got Talent and American Ninja Warrior.
“There are a lot of options that were never explored outside the live event business as well as they could have been,” Mr. de Alba said. “The digitization of the content and the [intellectual property] is certainly something that will feed into the next evolution of Cirque du Soleil.”
Catalyst is a private equity firm run by Toronto financier Newton Glassman that specializes in buying the secured debt of undervalued or distressed companies. The company has raised several funds with more than US$4.3-billion in capital commitments from university endowments, charitable foundations, pension plans and other clients, according to its website.
Making Cirque viable means taking lessons from the mistakes made under the previous ownership of U.S. private equity fund manager TPG Capital, China’s Fosun International and the Caisse de dépôt et placement du Québec, while emphasizing the main elements of past success such as the Las Vegas shows, Mr. de Alba said. “It’s an understanding of the core drivers of the business while at the same time having a very disciplined approach to investing capital,” he said.
The new owners have pledged to keep Cirque’s headquarters in Quebec for at least five years. Mr. de Alba insisted they’re sensitive to the connection of the company to its Quebec roots.
Catalyst had an eye on Cirque early on, both because of its international reputation and because of its capital structure. TPG took control of the privately held circus troupe in 2015 through a leveraged buyout, acquiring most of the company with Fosun and the Caisse from Mr. Laliberté. Cirque then borrowed more money to acquire productions such as the Blue Man Group and mount new shows, but earnings did not climb at the same pace, leaving the company exposed when the COVID-19 crisis hit with its full impact.
Catalyst started building its position in March, Mr. de Alba said. He wouldn’t say what it paid but Cirque debt was changing hands for between 40 and 50 cents of the face value of first-lien debt at the time. (First-lien debt-holders are the first to be repaid, ranking above all other lenders.) The other major creditors are largely U.S.-based, and include collateralized loan obligation (CLO) funds run by U.S. asset managers CBAM Partners and BlueMountain Capital.
When Cirque failed to make interest payments in late March on its first-lien credit facilities, and TPG and its two partners moved to transfer some of Cirque’s trademarks and intellectual property into a separate holding company they controlled in exchange for a $50-million loan, lenders faced their first test. As Catalyst saw it, TPG was trying to jump from being an equity investor to achieve creditor standing with direct access to some of Cirque’s collateral.
“That is not appropriate because that movement of assets has specific restrictions, especially when a company is on the verge of insolvency, which was the case,” Mr. de Alba said. He said he took on a leadership role within the first-lien lending group, giving them “conviction” in a negotiating strategy to win back the collateral and have their debt recognized for its full value.
TPG has said the asset transfer was approved by an independent committee at Cirque and that it was essential as collateral for the $50-million loan from the three owners, which it called “emergency financing” that would otherwise be unavailable given the disruption caused by the COVID-19 pandemic. The creditors eventually put up the money in a commitment backstopped by Catalyst.
A second surprise came when Cirque filed for bankruptcy protection and unveiled an initial bid by TPG, Fosun and the Caisse for the company that offered US$300-million to restart the circus troupe while paying lenders a fraction of what they are owed. Behind closed doors, the lenders were already in talks with Cirque on their own bid, with negotiations taking place even during the weekend before the filing, Mr. de Alba said.
“Maybe what they were hoping to do was to test if the lender group … had the willingness and the ability to recapitalize the company and put new money in,” Mr. de Alba said. “And I guess they were thinking that CLOs, because they have these structural limitations, were not going to be able to commit to funding the amount required for the reopening plan.”
The formal sales process for Cirque started with five qualified bidders, including offers from the TPG shareholders and the first-lien creditor group, according to the latest report by Ernst & Young, Cirque’s court-appointed monitor. Two other bidders joined shortly afterward, the monitor said. In the end, no one was able or willing to match the Catalyst-led offer.
“It’s sad. I’m not happy with the situation,” Quebec Economy Minister Pierre Fitzgibbon told a legislative committee last week, echoing similar concern from other politicians in the province that Cirque will be without a local shareholder in its ownership ranks for the first time since its founding in 1984.
The minister said the outcome for Cirque is a reflection of “an excess of liquidity in the system” that gave the lenders the ability to mount a bid whose value was nevertheless too much and too risky for anyone else. His government offered a US$200-million loan to Cirque in May, before it filed for bankruptcy protection.
“I didn’t think at the time that the creditors would do this but today they have money,” Mr. Fitzgibbon said. “My worry is that Catalyst is not aligned with the interests of the government. …. If they do what they say, it’s not so bad. But the problem is we have no assurance of that.”
Mr. de Alba, however, appears acutely aware that Cirque is a symbol of Quebec’s success abroad. And he’s talking growth, not dismantling.
“I’ve had a constructive dialogue with some of [Cirque’s] artists and artisans just for them to feel encouraged, re-energized and supported, that they have owners that care about them bringing their creative juices,” Mr. de Alba said. “Ultimately, the driving force of success is going to be to continue to deliver these worldwide acclaimed performances.”