EXCLUSIVE: Hell’s Kitchen studio Tinopolis may be hit with a class-action-style lawsuit and other backlash after an incandescent group of former producers were left out of pocket to the tune of £50 million ($70 million) as a result of a controversial financial restructuring.
Tinopolis is one of Britain’s largest production groups, owning 16 companies in the UK and U.S. including A. Smith & Co. Productions, which makes Hell’s Kitchen and Ninja Warrior, and Premier League soccer producer Sunset+Vine. But Tinopolis said it was hit hard by the coronavirus pandemic, during which revenue was dented by canceled sports events and “severe” filming restrictions in California, where it makes shows like the Rob Lowe-fronted Mental Samurai for Fox.
Tinopolis executive chairman Ron Jones launched a rescue mission that culminated in a complex financial restructuring last week. But the maneuver has stoked fury among around 15 producers who were once part of the group. They have questioned whether Tinopolis was in genuine peril and allege that Covid-19 has provided a useful “smokescreen” for management to wipe out the debt that was owed to them.
Deadline has spoken to more than a dozen people on both sides of the argument and sent a detailed set of questions to Tinopolis management. In doing so, we have attempted to establish a comprehensive picture of a highly unusual TV industry rupture that has pitted a super-producer against the very people who helped create value for the company and, in doing so, left once genial relations between colleagues in tatters.
In a carefully worded press release on the refinancing last week, Tinopolis said: “No staff, customers, suppliers or creditors to the various group trading companies are affected by this process.” What Tinopolis did not fully detail, however, was the cost to creditors at one of its non-trading companies. Around 15 producers and executives at companies acquired by Tinopolis have had £50M of loan notes written off after management voted to liquidate subsidiary DMWSL 584.
Alongside cash and shares, the loan notes were essentially formal IOUs promised to producers at the point their companies were purchased. According to a document seen by Deadline, they ranged from tens of thousands pounds to more than £25M in the case of Dan Cutforth and Jane Lipsitz, the founders of Nailed It! and Top Chef producer Magical Elves.
The so-called “disenfranchised” 15 all sold their businesses to Tinopolis in the expectation the loan notes would eventually payout. They include Cutforth and Lipsitz; Mark Soldinger, founder of My Big Fat American Gypsy Wedding producer Firecracker Films; John Brenkus and Mickey Stern, co-founders of Base Productions, which made ESPN’s Sports Science; Sally Sanders, who set up RuPaul’s Drag Race sales house Passion Distribution; and Stuart Carter, co-founder of Pioneer Productions, which makes Discovery’s How The Universe Works.
About Corporate Finance, the influential TV industry M&A broker, is also caught up in the scandal after facilitating the sale of Magical Elves, Base, Passion, and Pioneer to Tinopolis. “What has happened is completely outrageous. This is not in line with the deal consummated many years ago,” said ACF founder Thomas Dey, who previously enjoyed good relations with Tinopolis management.
These individuals are now coordinating with a view to bringing legal action against Tinopolis. According to several sources, they have held talks in recent days with a number of litigation funds about launching a class-action lawsuit, and there is a strong desire for legal recourse. Tinopolis told Deadline that there was no case to answer. Deadline also understands that the aggrieved loan note holders have drafted a bombshell statement, potentially sounding an industry alarm about doing business with Tinopolis.
Those impacted by the restructuring said they would not have sold their company to Tinopolis had they known that their loan notes would become worthless. “It’s a cautionary tale,” said Soldinger, who is owed £2.8M, according to the document we have seen. “People are always building companies to be acquired, but no one ever dreams that this could happen.” Another person, who stands to lose hundreds of thousands of pounds, added: “It’s a really good parable for people who are looking to sell their businesses. It’s not buyer beware, it’s seller beware.”
In written replies to Deadline questions, a Tinopolis spokesperson said: “The directors have always acted in line with their fiduciary duties. They have to act in the best interests of the company. Remember, directors and existing management have exposure to around half of the total loan notes themselves. To clarify: other loan note holders sold businesses to Tinopolis for a mixture of cash (c.50%-70%) and the rest in loan notes. These notes gave them returns based on the whole group, not on how the businesses they sold subsequently performed. Many of these in fact underperformed, yet their vendors received group-based returns over many years.”
So how did we get to this point?
Sources told Deadline that the financial restructuring follows Tinopolis management aborting a number of attempts to sell the group at the peak of its value. The company appointed broker ACF to facilitate a 2014 transaction in the hope of achieving an asking price of up to £300M. It received up to three offers above £250M, according to two sources, but Jones and CEO Arwel Rees opted to remain independent. There were at least two other sales attempts, according to a person familiar with the matter, not least in March 2017, when Tinopolis went to market again with a sales memorandum that leaked to The Guardian. Again, no deal was done.
“It was astounding,” said a person close to the process, who added that producers within the group “wanted the sale to move forward” and questioned the logic of walking away from deals. Commenting on the reasons for not selling, Jones told me in 2017: “Some would pay the money and some wouldn’t. But none of them gave us what we needed, which was a partner that gave the individual companies what they were looking for in terms of developing their business.” Asked by Deadline this week why credible offers for the business were turned down, a Tinopolis rep added: “The only measure of a ‘credible’ offer is one at a level that is acceptable to the majority of shareholders.”
So the company changed tack and by October 2017, management bought out a 48% stake in the business held by private equity partner Vitruvian Partners during a financial restructuring that also saw Tinopolis acquire Vitruvian’s loan notes. The move triggered a compulsory purchase of other Tinopolis equity holders’ shares for the nominal price of £1. In parallel, Tinopolis pushed the date for repaying the loan notes back from 2018 to 2025, while the interest on the repayment was cut. Prior to this, some loan note holders enjoyed a 12% interest rate.
For producers who sold their businesses to Tinopolis for a mix of cash, equity, and loan notes, it meant that their shares effectively became worthless overnight and that they would have to wait another eight years for their loan notes to pay out at a lower interest rate. “At this point, I decided to start writing off the loan notes in my head because I thought if they could do that, they’ll do anything,” said one person affected. Aggrieved former producers allege that the coronavirus crisis has now given Tinopolis a “fig leaf” to wipe out the loan notes completely. Tinopolis denied this. “This restructuring is entirely driven by financial difficulties caused by Covid. The repurchase of Vitruvian’s shares is a separate issue of which all equity holders were aware,” a spokesperson said.
Despite some producers being braced for bad news, many said it was still a shock when they received notice from Tinopolis on March 12 that it planned to liquidate DMWSL 584, the subsidiary holding the loan notes. On March 24, a number of former Tinopolis producers took part in a tense video call with Jones and liquidation firm Buchler Phillips, during which they were told that the economic headwinds of the pandemic had left management with no choice but to write off the loan notes. Those on the call said they were offered little opportunity to ask detailed questions, while one person was said to be tearful in challenging Jones. “It was absolutely appalling,” said one onlooker. Another added: “There was a lot of anger on that call. It was very unpleasant.”
Ultimately, the producers didn’t have enough votes to halt the liquidation or block the appointment of Buchler Phillips amid fears that the insolvency company had links to management. Buchler Phillips carried out advisory work for Tinopolis last year (valued at between £200,000 and £300,000, according to Tinopolis) and when producers questioned if this represented a conflict of interest, the liquidator said it was “independent and will meet the obligations fully and professionally,” per correspondence seen by Deadline.
Following the meeting, producers involved worked out that they only had a 49% share of the votes, with 51% being loaded in the favor of management. This is because management owned the Vitruvian loan notes, while A. Smith & Co. Productions founder and Tinopolis U.S. chairman Arthur Smith voted by proxy with management to liquidate DMWSL 584. Smith is owed around £25M in loan notes but has remained loyal to Tinopolis. He declined to comment when approached by Deadline. “A majority vote was achieved for the proposal and it is not for us to say how individuals voted,” said Tinopolis.
Soon after the March 24 call, loan note holders discovered that 95% of the shares in the group’s trading entities, listed as Red Dragon Acquisitions on the UK’s Companies House, were transferred to a new management-owned company, Tinopolis Group Limited, which was incorporated in November last year. Tinopolis Group Limited was established with up to £300,000 of management capital and support from lenders, who have made £10M in new debt available to the business. Tinopolis directors have made an offer for the remaining 5% in DMWSL 584. They said this slice of the business was left on the table to “provide some value to loan note holders.”
Announcing the restructure last week, Jones said: “Tinopolis now enters an exciting new phase and is well placed to resume its growth path as the global media industry adjusts to life after Covid. The damage caused by Covid has been significant and a complete recovery will not be easy.” He did not disclose the financial hit the group had taken, but boasted that the “underlying business has shown considerable resilience.” Tinopolis’ most recent earnings for the year to September 2019 showed revenues were up 19.3% to £272M, while pre-tax profits stood at £1.8M.
Loan note holders are dubious that a company that was valued by Jones at £300M four years ago could now be worth £300,000. They also suspect that Tinopolis directors are planning another sale bid either later this year or in 2022 — a sale they could stand to benefit from significantly given their increased grip on the company and its reduced debt. Tinopolis did not deny another sale effort is on the cards, but said management is “entirely focused” on recovery at the moment.
“They’ve managed to dump us, but they’re then going to go and sell our companies in a group and realize the value for them. That’s tough to watch happen,” said Passion Distribution founder Sanders, who now serves as an executive producer on RuPaul’s Drag Race UK. Another former employee added: “In retrospect, we were crazy to sell our companies to Tinopolis as they didn’t pay what was promised. And secondly, after what we’ve been through, anyone would be crazy to buy Tinopolis in the future.”
Needless to say, those within the group feel differently. Some 650 jobs were protected by refinancing and there is a view among some insiders that many of the former producers bailed out of the business with the cash they made after being acquired, and some are now actively competing with Tinopolis. For example, Cutforth and Lipsitz’s new company Alfred Street Industries is making a new season of Project Runway for Bravo after the show was originally housed at Magical Elves. Jeff Foulser, the chairman of sports producer Sunset+Vine, said: “I appreciate why people are upset, but people left the business, left their loan notes, and we had to refinance. Something had to give.” Fousler contributed to the £300,000 recapitalization and said employees are “feeling very good and positive” about the future.
In an interview with the Financial Times last week, Jones said “anything that goes out to the loan note holders is a bonus” based on the performance of the business. This infuriated those who stand to lose money. “What the f*ck? It was not a bonus, it was supposedly a bulletproof part of the deal,” remarked one producer who is owed millions. Two individuals pointed out that producers in the U.S. paid tax on the loan notes.
All of the aggrieved loan note holders who spoke to Deadline said they would have been prepared to engage in a negotiation over what was owed to them, and a number said they would have settled for a smaller amount of money. “A lot of the people would have agreed to that. But instead, in the dark of the night, they wiped out everybody’s equity three years ago, and now they’re wiping out everybody’s debt,” said one person close to the matter. Stuart Carter, the former managing director of Pioneer Productions, added: “It’s really sad to get rid of the shares and the loan notes of the people who helped build the company. They want everything, but I think they have made themselves look very bad.”
Now, the disenfranchised 15 feel like they have little option but to consider legal action and have consulted lawyers about next steps. They have been told they have a good case, but litigation will be costly, time-consuming, and complicated, with no guarantee of victory in the British court system. That is why they have held meetings with litigation funds, which would shoulder the financial risk of pursuing Tinopolis in return for a cut of what is owed to the loan note holders, should they be successful. An unnamed fund is currently assessing their case before a decision will be made over whether to move forward. A Tinopolis spokesperson said: “There is nothing to defend. This is a transparent, legal process, with voted approval. The liquidators are, in any event, acting as officers of the court.”
The former producers are also considering other retaliation action. Deadline understands that they have drafted a statement about their experience, which they are considering circulating to key industry stakeholders, including broadcasters and streamers. It is understood that they will make a decision over whether to appoint a litigation fund before pressing send on the statement, given that lawyers may advise them against such an intervention. “We’ve drafted something, and I think we’re waiting for it to be looked at legally, but it’s pretty damn good. The industry needs to know about it,” said a source who has seen the statement. “It will be up to broadcasters like the BBC, ITV, and Channel 4 whether they want to work with a company that treats its employees like this.”
Tinopolis said the restructuring had been well received by the industry. “The reaction we have had so far from commercial partners has been positive and supportive. This is not surprising, given that the company and 650 jobs have been saved during a pandemic. The survival of Tinopolis is good for customers and for the industry,” a spokesperson said.
For now, loan note holders are counting the cost of the value they have lost after selling their business to Tinopolis. One person said they would have used the loan notes to pay for the medical tuition fees of their daughter, who has been training in the teeth of the coronavirus crisis. Another was planning to double down on their philanthropic endeavors since leaving the industry. Others wrote off the money a long time ago, but as one person put it: “Nobody loses millions of quid without feeling it somehow.”