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This Day in Buyout History

This day in buyout history: Apollo cashes in and catches a flick

At first glance, spare change might not seem like big business. But during the 1990s, a Seattle-area company called Coinstar proved that it was. And then private equity took notice.

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At first glance, spare change might not seem like big business. But during the 1990s, a Seattle-area company called Coinstar proved that it was, rising to prominence with its nationwide network of kiosks where customers could exchange a jar full of loose coins for paper bills—with Coinstar taking a nominal cut, of course.

In 2005, Coinstar began to expand its scope, acquiring a significant stake in a similar business, Redbox, an operator of movie-rental kiosks. Both Coinstar and Redbox’s offerings were self-service, and both preferred to locate their kiosks in grocery stores and convenience stores, with easy access for clients of every sort. Three years later, in 2008, Coinstar took majority control of Illinois-based Redbox. Five more years after that, the consolidated business changed its name to Outerwall.

And so things stood until three years ago today, when Apollo Global Management entered the picture on September 27, 2016. That day, Leon Black’s firm consummated a take-private buyout of Outerwall for $52 per share, or about $1.6 billion—a move that followed a year full of troubling developments for Outerwall’s stock price and growing pressure from an activist investor. Upon completing the deal, Apollo promptly broke Outerwall up into its component parts, and the decade of Coinstar and Redbox sharing a corporate umbrella came to an end.

First, though, let’s circle back to how it began.

Founded in 1991 and incorporated in 1993, Coinstar spent the first decade of its existence building out its operations, with its rise funded in part by venture capital: Grayhawk Capital and Acorn Ventures were among its early backers. The company went public on the Nasdaq in 1997.

By 2002, when Coinstar was profiled in The Wall Street Journal, it claimed more than 10,000 coin-sorting kiosks that were estimated to process roughly $1.7 billion combined that year.

Redbox, meanwhile, had a more unique origin story. It was founded in 2002 by a division of McDonald’s, originally operating as an “automated convenience store” under the name Tik Tok Easy Shop, selling food and household supplies in addition to movies. A year later, in 2003, McDonald’s shuttered the experiment; a New York Times story from the time, though, noted that the fast-food chain “would continue to operate about 12 machines that sell just DVDs.”

It quickly became apparent that movies were the company’s immediate future. By 2005, there were about 800 Redbox locations throughout the US renting DVDs at the company’s standard rate of $1 per night. That November, Coinstar agreed to pay $20 million to McDonald’s Ventures for a 47.3% stake in Redbox. On the first day of 2008, Coinstar exercised its option to take a majority stake in Redbox, and the following year, it shelled out $162.4 million in cash and stock to acquire full control of Redbox’s operations.

Over the next handful of years, the combined company’s stock price began to skyrocket. In February 2009, at the time of the Redbox takeover, it was languishing at barely $20 per share. By the summer of 2015 (and after an official name change to Outerwall), shares were trading for more than $80 apiece.

In its early days, Redbox succeeded by undercutting the prices of rivals like Blockbuster and Hollywood Video. By the middle of the decade, though, the shape of the home media industry had changed. Gone were the video-rental stores of the past. In their place was Netflix, quickly establishing itself as a streaming colossus bent on hoovering up as much of the movie-watching market as it could.

By 2015, Redbox’s network had grown to more than 40,000 locations. But it wasn’t enough to combat changing market tides. In February 2016, Outerwall reported a 17% YoY decline in Redbox’s 4Q revenue, and the company’s overall revenue decreased by $120.8 million between 2014 and 2015. Spooked investors began to flee, and before long, Outerwall’s stock price had once again plummeted to below $30 per share.

At least one backer, though, chose a different path of action rather than simply selling off its stake. Two weeks after that fateful earnings call, an activist investor called Engaged Capital, which had a 14.6% stake in Outerwall, released a public letter calling for Outerwall to consider moves to increase shareholder value and accusing the company of “squander[ing] approximately $1.2 billion of shareholder capital.” A month after that, Outerwall officially announced plans to explore its strategic options.

Things continued to move quickly. On July 25, 2016, Outerwall revealed an agreement to sell itself to Apollo for $52 per share, just about splitting the difference between the high and low points of its stock price over the past few years. And two months after that, the deal was done, with Coinstar and Redbox splitting into two separate businesses. (Coinstar also absorbed ecoATM, a former Outerwall unit where people can exchange old cell phones, tablets and other tech devices for cash.) At the time of the deal, the companies operated nearly 60,000 kiosks combined.

And now every one of those kiosks, in a roundabout way, contributes the littlest bit to Leon Black’s annual nine-figure payday. Even today, it turns out spare change can be big business after all.

Featured image via CatLane/iStock/Getty Images Plus

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    Written by Kevin Dowd

    Kevin Dowd wrote The Weekend Pitch newsletter for PitchBook, covering startups, buyouts and the rest of the private market.

    A native of the Pacific Northwest, he’s an alumnus of the University of Washington with a degree in creative writing and journalism. He enjoys books and basketball and, most especially, books about basketball. He feels uncomfortable writing about himself in the third person.

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