8:58am PT by Eriq Gardner
Fox, Private Equity Giant Schemed to Strip 'American Idol' Producer, Lawsuit Claims
Five years ago, American Idol was king of the television landscape, a seemingly invincible ratings winner, when Apollo Global Management, one of the world's biggest private equity firms, made a highly leveraged deal to acquire Core Media Group, the production company behind the singing competition show. Since the $510 million acquisition, ratings tanked, the show was canceled, and in April, Core filed for Chapter 11 bankruptcy. Now, a new lawsuit comes along that charges Apollo with working with 21st Century Fox and Endemol on an "elaborate joint venture arrangement designed to strip Core of its remaining cash, transfer Core's corporate opportunities to its competitors, and ultimately leave Core to default on its obligations to its lenders."
The complaint was filed in Los Angeles Superior Court on Monday by Core litigation trustee Peter Kravitz, less than three months after a bankruptcy judge approved a reorganization plan that de-levered Core's debt by more than $385 million after deals with TCP, Crestview and other leading creditors. The drama has already featured a fight with Idol creator Simon Fuller, but that's perhaps nothing compared to what's coming.
According to the complaint, when Apollo made its acquisition in 2011, it financed the purchase with a short-term bridge loan that had some important restrictions. Core was allegedly obligated to repay lenders if the company underwent a change of control and only engage in mergers or business combinations if the newly formed entity agreed to assume the obligations on loans.
"The lenders imposed these restrictions on Apollo to ensure that Apollo had 'skin in the game,' and would not be able to effectively take value away from Core, or enjoy an exit event, in ways that would disrupt the lenders' ability to be repaid by Core under the lending agreements," states the complaint.
In 2014, Apollo worked out a deal with 21st Century Fox for a joint venture called Endemol Shine Group, combining Core's operations with Endemol along with Fox's Shine USA. This created a reality production powerhouse. Besides Idol, Core is responsible for So You Think You Can Dance. Endemol (with money from Apollo) has produced shows including Big Brother, Fear Factor and Deal or No Deal. Shine was founded by Elisabeth Murdoch and is responsible for The Biggest Loser, among other hits.
But according to Kravitz, the arrangement amounted to a change in control of Core. One insider at Apollo is said to have privately described it as an "operational merger" with others lawyers at the private equity firm allegedly preparing talking points that Core would be "effectively operated as a subsidiary of Endemol."
"Yet, Apollo failed to cause Core to repay the loans owing to the lenders or provide for the entities with which Core was combined to assume the obligations owing to the lenders," claims the suit. "Apollo orchestrated this scheme in an effort to monetize its investment in Core while keeping Core's lenders from Apollo's interests in Endemol and Shine."
Apollo allegedly executed this move once it realized that its big bet on American Idol wasn't working out. The lawsuit brings up Apollo's role in the Caesars Entertainment bankruptcy case and states that "history has since shown that Apollo is willing to bend and break the rules to engineer escapes from unfavorable financing positions, leaving its acquisition targets to succumb to bankruptcy while creditors are left holding the bag."
With Fox's "participation," Kravitz claims Core was forced into a "Shared Services Agreement" with Apollo-controlled Endemol. Although Fox and Apollo each had a 50 percent stake, Apollo is described as relinquishing control to Fox over the management committee that would operate the entity. The deal "ultimately benefited Apollo and Fox at the expense of Core and its creditors," claims the suit.
Apollo also allegedly used an inflated valuation of Core so as to end up with 50 percent of ownership of the joint venture and "undertook steps to conceal and mislead as to the substance and nature of the transactions."
It's also claimed that in preparation for the Endemol "merger," Apollo began causing Core to shift its focus from managing stable and consistent revenue streams to "new and potentially riskier business strategies."
In 2013, for example, Core sold rights to manage the intellectual property of Elvis Presley and Muhammad Ali to Authentic Brand Groups for $115 million, according to the complaint. "Ostensibly, the reason for the sale was to generate cash that Core could use to acquire a stake in a planned merger with Endemol, but in reality Apollo refused to permit Core to invest in Endemol, distribute the cash to the lenders, or otherwise re-invest the proceeds," states the lawsuit. "Instead, the cash remained at Core, earning very little interest and being whittled down to pay operating expenses."
Apollo is also alleged to have arranged to pay itself more than $5 million for management services, arranged to have Core pay Endemol a $2 million annual fee for administration, caused Core to cease conducting board meetings, plus more before the American Idol producer eventually declared bankruptcy.
Apollo, Fox, Endemol and others are now being charged with inducing a breach of contract between Core and its lenders. Represented by attorneys at Quinn Emanuel, the plaintiff demands compensatory and punitive damages.
An Apollo spokesperson responds, "The lawsuit is without merit and we intend to defend ourselves vigorously."