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Redbox

Entertainment has become the market’s new favorite meme stock. It isn’t going to end well.

Best known for its network of 38,000 DVD rental kiosks, Redbox (ticker: RDBX) earlier this month agreed to be acquired in a stock swap by Chicken Soup for Soul Entertainment (CSSE), which owns a group of advertising-supported streaming services. Under terms of the deal, Chicken Soup will assume $321 million of Redbox debt, and issue 0.087 shares for each outstanding Redbox share.

So here’s the crazy part. Under that formula, each Redbox share would be exchanged for Chicken Soup shares now worth about 59 cents. But Redbox isn’t trading at 59 cents. Late Friday, the stock was quoted at $7.71, which was actually down 10 cents on the day. The stock price has nearly doubled over the past six trading days, leaving Redbox shares overpriced by more than 13 times.

It’s also worth noting that the trading volume in Redbox seems almost impossibly high. Over the past six days, Redbox has traded nearly 220 million shares. But there are only 12.6 million of the company’s free-trading Class A shares outstanding. 

Another 32.8 million shares are held by the investment firm Apollo Capital. As Barron’s detailed in a previous story on the deal, Apollo’s stake has a long history. In 2016, former Redbox parent Outerwall was taken private by Apollo for $1.6 billion. In addition to Redbox, Outerwall owned Coinstar kiosks (for cashing in loose change) and the ecoATM electronics-recycling kiosks. Apollo still owns Coinstar, and holds a majority stake in ecoATM.

Last October, Apollo took Redbox public via a merger with a special-purpose acquisition company, or SPAC, called Seaport Global Acquisition Corp. Within days of the completion of the deal, Redbox shares traded for as much as $20. But the stock soon got caught up in the late 2021 selloff of technology shares, and ended the year at $7.41.

Apollo maintained majority control after the SPAC merger closed. Including the conversion of some debt, it holds about 80% of the outstanding Redbox shares, according to Chicken Soup. Apollo will own about 15% of Chicken Soup after completion of the deal.

Asked about the situation, Zaia Lawandow, head of investor relations for Redbox, on Friday declined to offer an explanation. “We can’t comment on where the stock trades relative to the implied valuation in the merger agreement,” she said via email.

Chicken Soup CEO William Rouhana previously told Barron’s he expects the transaction to close within the next two to three months.

On Friday, B. Riley analyst Eric Wold cut his rating on Redbox shares to Sell from Neutral, with a price target of $1, down from $3. Wold conceded that it is possible that heightened investor interest and speculative “meme” trading could create ongoing volatility in the stock, and potentially drive the price even higher, but said the valuation “will ultimately correct itself.” 

Wold noted that controlling shareholders for both companies have already approved the deal, there aren’t any regulatory concerns, and in his view, “very little risk” that the deal won’t close.

Once a real stock, Redbox shares are now all about a game of, well, chicken. Unless you think Chicken Soup shares are going to skyrocket from here—the stock has actually sold off 6% since the deal was announced, reducing the implied valuation—then owning Redbox shares is simply a bet on how far they can rally before the inevitable collapse. At some point, the chickens will come home to roost. 

Write to Eric J. Savitz at eric.savitz@barrons.com