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Playboy Might Kill Magazine to Focus on 'World of Playboy'

The Wall Street Journal. logo The Wall Street Journal. 1/2/2018 Lukas I. Alpert

The death of Playboy founder Hugh Hefner is ushering in a new era for the adult-entertainment enterprise in more ways than one.

His passing in September at the age of 91 has set in motion a process that will move ownership of the iconic brand out of his family’s hands and could soon spell the end of its once pace-setting U.S. print edition after nearly seven decades on newsstands.

Playboy Enterprises Inc.’s controlling shareholder—private-equity firm Rizvi Traverse—is in talks to acquire the 35% stake Mr. Hefner left in trust to his heirs, a person familiar with the matter said. At the same time, the company says it is doubling down on efforts to make money from brand partnerships and licensing deals built around the Playboy name, ethos and bunny logo, with increasingly less focus on its editorial roots.

“We want to focus on what we call the ‘World of Playboy’ which is so much larger than a small, legacy print publication,” said Ben Kohn, a managing partner at Rizvi who took over as Playboy Enterprises’ chief executive in May 2016. “We plan to spend 2018 transitioning it from a media business to a brand-management company.”

Mr. Hefner’s death will hasten that transition. Rizvi, which helped him take Playboy private in 2011 in return for control of nearly two-thirds of the company, had agreed to continue publishing its flagship magazine while he remained alive. The deal also granted Mr. Hefner some ability to approve or block certain deals, people familiar with the arrangement said. Those rights don’t pass to his heirs.

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As a first step, Playboy will look to raise $25 million to $100 million in outside equity in early 2018 to fund future partnership deals and to help buy back the Hefners’ shares, a person familiar with the matter said.

Since 2011, Playboy has moved to turn itself into more of a lifestyle brand, focusing on licensing deals to produce things like bunny-ear stamped wallets in China, and slap the Playboy name on nightclubs in India and casinos in London. While the company now gets at least half of its revenue annually from such deals, results have been mixed.

For example, a 2014 deal that paid platinum-selling Miami rapper Pitbull $3 million to put his name on and promote a co-branded line of men’s suits under the label “Pitbull After Dark” never came to fruition, in part due to difficulties getting department stores to carry it. In the end, all Playboy Enterprises got for its investment were a few party appearances and the rapper’s picture on Playboy-themed slot machines, according to people familiar with the deal.

Two nightclubs in casino hot spot Macau closed quickly after it proved difficult to secure gaming licenses. Another in the Indian beach resort of Goa never opened after meeting local resistance.

Other licensing deals, like a fragrance line and a lounge on the Sunset Strip in Los Angeles, have been successful. Much of the licensing business has been focused in China, where the magazine doesn’t exist and the company is viewed more as a lifestyle brand.

Mr. Kohn says the company will now focus less on pure licensing deals and more on equity partnerships and joint ventures around Playboy-themed projects. Recent deals include developing a Playboy-branded line of spirits, a Playboy Club in New York and a Shanghai music festival, as well as plans for a lingerie and swimsuit line in China.

The company also recently moved its “Midsummer Night’s Dream” and Halloween parties from Playboy’s famed mansion to nightclubs in Las Vegas, where they have become revenue-generating events rather than marketing expenses for the magazine.

Meanwhile, the magazine has lost as much as $7 million annually in recent years, people familiar with the matter said, and was already scaled back to six issues annually from 10, following a brief experiment in which it ceased printing nude photos. U.S. circulation has slipped to under 500,000 copies an issue from 5.6 million at the peak in 1975.

Although a final decision hasn’t been made, the company is seriously considering the future of the print magazine.

“Historically, we could justify the [magazine’s] losses because of the marketing value, but you also have to be forward thinking,” Mr. Kohn said. “I’m not sure that print is necessarily the best way to communicate to our consumer going forward.”

As part of the original arrangement when the company was taken private, Mr. Hefner’s death triggered a call option in which Rizvi has exclusive rights to buy the trust’s 35% stake. Similarly, his heirs have a put option, allowing them to force Rizvi to acquire their shares, people familiar with the matter said.

The two sides are currently negotiating how to value the company, one of the people said. Two years ago, Playboy was put on the block for $500 million, but only the mansion was sold for $100 million.

If a price can’t be agreed upon between Rizvi and the Hefner estate, the matter will go to arbitration, and if a deal isn’t reached within 12 months of Mr. Hefner’s death, the family can put the shares on the open market. But that would leave them on the hook for coming up with the cash to cover the estate taxes, people familiar with the matter say.

Representatives of the trust and Mr. Hefner’s four children, including his 26-year-old son Cooper, who took over as chief creative officer of Playboy in 2016, didn’t respond to requests for comment.

The new era for Playboy comes during a turbulent period in the magazine industry. Companies are searching for scale and alternate revenue streams as advertising spending shifts to digital platforms.

But some, like Rizvi, see promise in these stalwart brands—given the right strategy and execution. That is part of what motivated Meredith Corp. to agree to buy Time Inc. for $1.85 billion and why Penske Media bought a controlling stake in Rolling Stone.

In 2017, Playboy’s revenue declined to about $90 million, roughly split between its media and licensing divisions, according to a person familiar with the numbers. In 2016, licensing generated $57 million, and $43 million came from the media unit, which includes the magazine, subscription websites and an adult pay-per-view channel, the person said.

Mr. Kohn said Playboy was profitable in 2017 and is projecting 20% revenue growth for 2018. He also insisted that Rizvi intends to remain in the picture for the long term.

“The company is not for sale,” he said. “We are in the process of a period of substantial growth with a lot of great stuff in the pipeline.”

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