4Kids Entertainment and The Deals That Never Were

October 5, 2012 at 7:59 am | Posted in 4Kids, Bonds Beyond Time, Other Stuff | 2 Comments
Tags: lawsuit, manga entertainment uk, toonzai

On April 6, 2011, 4Kids Entertainment filed for Chapter 11 bankruptcy protection to stop Japanese Yu-Gi-Oh! licensors TV Tokyo and NAS/ADK from seizing the rights to the coveted Yu-Gi-Oh! property after they had terminated their dealings with 4Kids. Since then, a lot of good things have happened to 4Kids, including a victory over the licensors in a lawsuit to retain the Yu-Gi-Oh! rights, an $8 million settlement paid to 4Kids, and 4Kids’ subsequent sale of the Yu-Gi-Oh! property for $15 million.

Given the company’s lack of accomplishments in the ever-weakening children’s licensing and advertising markets in recent years, it’s an odd notion that the turmoil from being driven into bankruptcy and the resulting court proceedings have put 4Kids in a position of success that it hasn’t seen for years on end. Not only is 4Kids free from its toxic relationships and able to pay off its creditors in full, but the company is also left with plenty of cash to maintain a healthy equity balance. But what did 4Kids lose in order to attain this position?

When 4Kids and the licensors first announced their intentions to settle, I invited you to consider how the parties may have arrived at the $8 million settlement figure that 4Kids received. Today, October 5, 2012, is a turning point in 4Kids’ history. Almost exactly 18 months to the day it filed for bankruptcy protection, 4Kids will be submitting its Chapter 11 disclosure statement, the first step to exiting bankruptcy. The company will reveal its current financial situation and discuss its intentions to reorganize. As we enter this pivotal day — one forever to be inscribed in the annals of children’s licensing, marketing, and programming — let’s revisit my thought experiment in more detail.

The Broadcasts That Never Were: New Shows From Toei Animation, Dentsu, and Viz Media on Toonzai; Yu-Gi-Oh! on Nicktoons

In July 2010, 4Kids unveiled its plans for Toonzai, a complete rebranding of its Saturday morning programming block on The CW that would serve as a hub for children’s anime. The success of Toonzai would rely on 4Kids’ ability to pick up new shows for the block. As presented during the lawsuit, 4Kids was in discussions with three companies to license new anime: Toei Animation, Dentsu, and Viz Media. These plans ground to a halt due to the lawsuit and bankruptcy.

Toei, with whom 4Kids had had a long-running business relationship over the years, refused to license any more of its shows to 4Kids, a decision that 4Kids believed was induced by ADK. Dentsu declined to continue negotiations with 4Kids until after the Yu-Gi-Oh! lawsuit had been resolved. Viz Media agreed to continue informational discussions with 4Kids, but would not be closing any potential deals. The future of Toonzai was bleak.

What anime series could have graced us with their presence on The CW? We may never know. Toonzai’s chances of picking up new shows had been devastated, and the block was relegated to a paltry handful of new content and a slew of reruns.

It wasn’t only the acquisition of new anime that suffered, however. Prior to the lawsuit, 4Kids had been in negotiations to sell TV broadcasting deals for the Yu-Gi-Oh! series to Nicktoons, as well as to several other overseas networks. These parties, too, backed out under the weight of the lawsuit.

The Home Videos That Never Were: DVD and Blu-ray Releases of Yu-Gi-Oh! 3D: Bonds Beyond Time

In 2011, Yu-Gi-Oh! 3D: Bonds Beyond Time arrived in the United States. The movie saw a limited run in theaters, with digital film distributor Cinedigm holding screenings on February 26 and 27 and again on March 5 and 6. Fans might remember seeing some trailers for the movie posted on 4Kids.TV and 4KidsTV.com that mentioned a home video release. Whatever happened to that? Or was that a dream?

No, you aren’t imagining things. There was indeed a trailer for the movie featuring narrator Dan Green, who invited fans to “look for the home video release this fall,” and featuring a mock-up of a video cover with the text “Coming This Fall!” proudly displayed. And indeed, there were Internet retailers offering a Bonds Beyond Time DVD for pre-order, with a July 19, 2011 street date and A&E Home Video listed as the distributor.

Some Yu-Gi-Oh! fan sites were quick to declare that the highly anticipated video release of Bonds Beyond Time had come. I, on the other hand, was puzzled by the lack of press and held off on posting an announcement. In April 2011, fans who had pre-ordered the DVD suddenly saw their orders canceled; retailers removed all traces of the product from their virtual store shelves; the trailer disappeared from 4Kids’ websites, never to be seen again; and to this day, there has been no home video release of the movie in the United States. What happened?

Although some fans questioned the legitimacy of A&E Home Video’s involvement with the Bonds Beyond Time DVD, the lawsuit revealed that 4Kids had in fact been negotiating the licensing of certain Yu-Gi-Oh! home video rights with parent company A&E Television Networks since March 2011. The cancelation of the pre-orders in April was no coincidence, as A&E severed its discussions with 4Kids because of the lawsuit and bankruptcy.

Across the pond in the UK, British fans were still treated to both a theatrical and a DVD and Blu-ray release of the film. 4Kids Entertainment International, the London-based subsidiary of 4Kids, was not entwined in the bankruptcy proceedings in the U.S. and was thus able to conduct business as usual, securing distribution rights for the movie with Manga UK. Bonds Beyond Time was screened on May 14 and 21, 2011. The DVD and BD, initially targeted for a May 30 street date, were released on July 25, 2011.

The UK’s theatrical screenings were made possible through a partnership with Picturehouse Cinemas and Everyman Cinemas. They were not successful. In episode 4 of Manga UK’s monthly podcast, Jerome Mazandarani, the Head of Marketing and Acquisitions at Manga UK, revealed that the occupancy rate for the 26 screens showing the movie was less than 10 percent. Comparable numbers are not available for the U.S. theatrical release, which saw a limited distribution on 300 screens (up from the originally planned 250), but it’s a safe bet that everyone who participated in this release lost money. The movie’s poor performance puts a damper on the possibility of a future DVD and BD release in the U.S.

On the other hand, the Bonds Beyond Time DVD was Manga UK’s #2 seller in 2011, second to the Akira BD’s nearly 12,000 units. Hmm, there may be hope yet for us Americans.

The Acquisition That Never Was: A Merger with Classic Media

In 2009, 4Kids Entertainment hired Montgomery & Co., an investment bank specializing in mergers and acquisitions, to help it develop a financial strategy in light of the challenging economic climate and 4Kids’ continual loss of revenue. Strategic alliances, mergers, or even outright sales of the company or its assets were all possibilities. 4Kids’ search for investors and suitors continued as it entered Chapter 11, with the company retaining the services of BDO Capital Advisors in June 2011.

Although 4Kids had referenced a possibility of an acquisition early on in the bankruptcy, it wasn’t until the preliminary stages of the lawsuit in June 2011 that a name finally emerged: Classic Media. With an already vast library of over 400 titles, including Casper the Friendly Ghost, He-Man and the Masters of the Universe, and Voltron, Classic Media looked to further enhance its offerings by acquiring the rights to the Yu-Gi-Oh! franchise.

Classic Media had been in discussions with 4Kids about a possible merger since November 2010. Between January 2011 and March 2011, the pair set the stage for an all cash buyout of 4Kids at a “substantial premium” of its then market value. The merger was to alleviate some of the Japanese Yu-Gi-Oh! licensors’ concerns about 4Kids’ financial state. However, the same month Classic Media and 4Kids were set to sign a letter of intent to begin carrying out the merger, the licensors severed their ties with 4Kids, effectively killing the deal.

In November 2011, seven months into the bankruptcy, Classic Media returned to the negotiating table, again offering to buy 4Kids’ entire business. At the time, the lawsuit had still not been resolved and 4Kids was in need of cash, putting Classic Media in the driver’s seat and allowing it to offer a significantly discounted price. 4Kids, lacking a suitable alternative, proceeded to negotiate with Classic Media well into December 2011. Discussions between the pair advanced considerably, so much so that an asset purchase agreement, bidding procedures, and a sale motion had been prepared. Intrigued by the progress that had been made, I reached out to 4Kids for comment, who predictably was unable to offer any substantive comments.

On December 29, 2011, the court issued its ruling on the lawsuit. In light of the favorable decision, 4Kids ended its discussions with Classic Media, believing that it now had what it needed to leverage a better price elsewhere.

While it’s not clear exactly how much Classic Media offered 4Kids during its second crack at buying the company, 4Kids later noted that Saban’s $10 million offer for its Yu-Gi-Oh! property alone was “substantially greater” than Classic Media’s offer for its entire business.

4Kids did well to reject Classic Media’s second offer. But what about the original offer from March 2011? Where would Yu-Gi-Oh! be today if the parties had consummated the deal?

In July 2012, Classic Media was purchased by DreamWorks Animation for $155 million.

What’s Next For 4Kids?

Contrary to what you may have heard elsewhere, 4Kids isn’t dead, nor is it in dire straits. However, the “old” 4Kids that so many people are so familiar with, consisting of animation production and broadcast management teams, is no more, with Konami and Saban snatching up those businesses as part of the trio’s deal.

4Kids still exists as a licensing company, just as it once was before it made it big with Pokemon. It is still holding on to various properties (including animated children’s titles). And it is still headquartered in the same location in Manhattan. 4Kids’ settlement with Japanese Yu-Gi-Oh! licensors TV Tokyo and NAS, along with its successful assets sale to Konami and Saban, have left the company with mountains of cash.

Since the end of July, 4Kids has been looking to settle the other legal proceedings it is involved in, including one with The Pokemon Company International over various alleged “deficiencies” in payments (which I briefly touched upon when the Yu-Gi-Oh! lawsuit first made news in March 2011). It had also been looking at liquidating its London-based subsidiary 4Kids Entertainment International, the plans for which were finalized on September 30, 2012. On the same day, Michael Goldstein, the Interim Chairman of 4Kids’ Board of Directors who assumed the position in May 2011, also retired.

What will happen next with 4Kids? Will the company exit Chapter 11 bankruptcy protection and continue to trudge along, seeking out new properties to license in hopes of finding the next big hit? Will another company take a fancy to 4Kids and buy it out? Or will 4Kids use this opportunity to wind down and cash out while it is on top?

After 4Kids files its disclosure statement today, any parties with a vested interest in the fate of the company will have until October 25 to file an objection. A hearing to okay the disclosure statement is scheduled for October 30.