'Giant Ponzi Scheme': Are Reality TV Companies Worth Hundreds of Millions of Dollars?

Illustration by: John Ueland

"They're buying really expensive employment agreements and cash flow," says one top network executive.

This story first appeared in the June 6 issue of The Hollywood Reporter magazine.

If you own a reality TV production company with a hit series on a U.S. network, chances are you've already sold a stake -- for an eight- or nine-figure payout -- to a major television conglomerate. But what are firms such as Discovery Communications and ITV Studios actually buying when they snap up mom-and-pop shops that don't own format or distribution rights to the shows they produce? That's a question increasingly being asked as many in the unscripted TV world scratch their heads at the exorbitant prices being paid.

"I think a lot of this is a giant Ponzi scheme," says one top network executive. "They're buying really expensive employment agreements and cash flow."

It remains to be seen if reality TV's M&A boom -- fueled in part by the post-recession financial recovery and the desire of cash-rich players to load up on creators as the digital revolution creates more distribution options -- is a case of irrational exuberance. But underlying the current flurry of deals is the value (perceived or real) of premium unscripted content in a crowded marketplace. "As tech enhances the ability to access content, the demand for content will continue to expand," notes attorney Todd Weinstein, who reps clients in the reality space.

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That's why U.K.-based ITV has shelled out hundreds of millions of dollars to acquire a slew of U.S. production outlets including an 80 percent stake in New York-based Leftfield Entertainment (History's Pawn Stars and American Restoration) for $360 million in a May deal; a $40 million stake in Gurney Productions (A&E's Duck Dynasty); a $25.7 million stake in High Noon Entertainment (TLC's Cake Boss); and a controlling stake in Tony DiSanto and Liz Gateley's DiGa Vision (MTV's Ke$ha: My Crazy Beautiful Life). Tinopolis Group bought Magical Elves (Bravo's Top Chef) for $100 million-plus, and FremantleMedia paid $50 million for a 75 percent stake in SallyAnn Salsano's 495 Productions (CMT's Party Down South).

Of course, for every fat payday there are dozens of reality producers who subsist pilot-to-pilot. And the acquisition trend -- which essentially is a play for scale -- has fueled tension between buyers and sellers over the prices paid to produce shows. "The scary part about this is when a network looks at a deal and says, 'Hey, this company is worth this much money?' Their first response is, 'Oh we're paying those guys too much money. Let's scrutinize the budgets,' " says FremantleMedia North America CEO Thom Beers.

But the prices paid for hitmakers only are getting bigger. Two days after ITV's deal with Leftfield, Discovery and John Malone's Liberty Global announced a pact to acquire U.K. production and distribution giant All3Media for $930 million. And May 16, 21st Century Fox revealed its intention to partner with private-equity firm Apollo Global Management on a new venture with reality powers Endemol, Shine Group and American Idol parent CORE Media Group. "There's a little bit of a spitting match going on between these titans," says one insider. "They want to own it all."

Beers, arguably the pioneer of the dangerous-job reality genre with Ice Road Truckers and Deadliest Catch, sold a majority stake in his own company, Original Productions, to Fremantle in 2009. He agrees that the current boom is a "liquidity event" but notes that these deals won't necessarily create more leverage for global outfits such as Fremantle and ITV. The value of a future pipeline of shows is nebulous because even with a proven track record, no reality producer can guarantee hits. And many of today's hits are aging fast.

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"You could not have predicted that Pawn Stars or Honey Boo Boo or Duck Dynasty would be [hits]," notes Michael Nathanson, senior analyst at MoffetNathanson Research. "It's not like you're bankrolling Chuck Lorre or Tom Cruise. I'm not sure what you have."

And the ability of any reality show to separate itself from the glut is dependent not just on its quality, adds Nathanson, "but on the quality of the network, the quality of the time period. There's a lot of risk attached to it. The cable network can say, 'Look, is it better to be on Discovery or a third-rate network?' "

Indeed, cable networks increasingly are pouring resources into their own in-house studios in an effort to control the content pipeline. And if they need an outside production company, there still are dozens of hungry, young independent players out there.

As one producer puts it, "It's a great time to sell a company -- and it's a really bad time to start a company because the market is just oversaturated."