Don’t believe the hype that says he died broke. The Playboy mogul always had an ironclad estate plan in place, and now there’s a succession to match.
Hugh Hefner had all the pieces of a dynastic succession in place a quarter century ago. It took the last few months to fill in the last details.
The last phase started with selling the iconic Playboy Mansion for what might have actually been a windfall price of $100 million, liberating a lot of room on the company balance sheet.
A few weeks later, son Cooper came back to the company bearing the right attitude to embody the Hefner mystique and the right name to keep the future on point. He grew up in the mansion. He’s young and he’s vibrant.
And despite what you might have read elsewhere, he’s now the de facto owner of a big chunk of the Playboy empire on behalf of his siblings.
All Hugh needed to do was step aside, The timing was perfect. He didn’t even have to wait for Congress to repeal the estate tax.
Start with the trusts
There’s zero need to speculate about how Hugh shielded his legacy from the IRS. Because he ran a publicly traded company, his Playboy ownership is a matter of SEC record.
In 1991, he transferred the company and all its assets — including the mansion, the art collection, the clubs and all the intellectual property — into a trust.
Not coincidentally, that’s about a year after Cooper’s brother Marston, who was once the heir apparent, was born. Cooper joined the family a few months later.
A smaller trust was created later to hold Playboy shares that Hugh accumulated from other shareholders. From that point, his personal stake in the company for estate tax purposes was zero.
No shares mean that even if he wanted to give any of his ex-wives a slice of the empire, it wasn’t his any more to give. On that level, the prenuptial agreements truly were “ironclad.”
Needless to say, this is why we’ve always advocated a trust-and-prenup strategy for dynastic families. The agreement sets the terms for a marital split. The right trust ensures that family property stays in the family even if the agreement ruptures.
For Hugh, the trusts played a strategic role by ensuring that the business remained in centralized hands, much like the family newspaper trusts that control the New York Times and other media outlets.
In other family enterprises, it’s trivially easy for individual heirs to sell inherited shares to outsiders, diluting the overall position and fraying the bond between blood and business. The four Hefner kids couldn’t do that even if they wanted to because they don’t own the shares. The trusts own it all on their behalf.
Of course, when private equity “bought” Playboy, Hugh and his fellow trustees directed the trusts to swap their shares for only 37% of the new entity. As such, the house of Hefner no longer has complete control of the company, but they’ve still got a big enough stake that their private equity partners need to take their proposals seriously.
Still the main name on the masthead
The trusts have seats in the equivalent of the Playboy board of directors. Hugh maintained enough power to get himself named Editor in Chief for life, with total creative control and a stipend of $1 million a year.
The private equity firm didn’t want to risk him raising a stink and wrecking the company they’d acquired. And when push comes to shove, that means letting the family call the shots as well.
Last year Cooper came out swinging at the current Playboy CEO for making bad decisions like eliminating the centerfold. Four months later, the offending executive was gone and Cooper was back as chief creative officer.
At that point, Hugh didn’t need to hang on any more. He could die knowing his dream had motivated family hands guiding the future.
Cooper has big digital media plans for revitalizing the brand and making it relevant again to his fellow millennials. After all, he’s barely 26, a full 65 years younger than his dad.
Whether his ideas sizzle or slide, what matters is that the private equity partners aren’t especially eager or willing to be Playboy’s brand ambassadors. They need someone with Hefner background and panache to pull this off.
If the Hefner family’s youngest and most dynamic representative takes his ideas and walks, the first place he’ll go is to have a talk with dad’s advisors who run the trusts. In that scenario, they may start lobbying hard to cash out their 37% and try again elsewhere.
Meanwhile, a company that lives on somewhat archaic fantasies can’t risk a public spat with the heirs, even if they’re only a minority interest. Without a leap forward, Playboy really seems doomed to become a mass of entertainment licenses for mostly emerging markets that still idolize 1950s Western cool. That’s a solid business, but it’s not exactly a home run.
For now, it’s Cooper’s shot. If he pulls it off, everybody’s happy — the family trusts own a piece of an increasingly valuable enterprise, the partners get paid.
Early last year, Hugh and the partners had practically given up on a succession plan. None of the Hefners raised a hand, so they started shopping the “old, dull” licensing-driven Playboy for $500 million.
When Cooper came back, talk of selling at that price stopped. Read between the lines and that's the moment everyone regained hope that the company can become a billion-dollar behemoth again. In that case, the really sweet exit is still ahead.
Rounding up the past
Of course, letting go of outdated models and sunk investments is part of the process of reaching for the future. If genius corporate founders had all the answers, their trusts would spell out every detail for how future generations should run the business.
That doesn’t happen. Sooner or later, even the best posthumous visions — from Steve Jobs to Walt Disney — turn into dead hands without new blood that truly understands the way the world keeps changing.
Hugh seems to have wrestled with that dilemma in the last twilight decade of his life. His original hand-picked successor, daughter Christie, retired a little bit early to focus on philanthropy and corporate board service. She’ll be 65 next month, with her career highlights largely behind her.
Christie sold a lot of Playboy stock at a reasonable price and earned a healthy salary. She doesn’t need the family trusts to pay her way.
Brothers David and Marston are very private people, but they seem to be on board with the Cooper-forward strategy. There’s no sign of infighting. They each had their shot at helping dad run the company and they walked away.
The company itself seems to be in a pretty good position to pay the trusts healthy enough dividends to keep everyone happy. Hugh ensured that by letting the company sell his mansion out from under him last year, provided that he got to stay there as long as he was still alive.
That $100 million deal only lasted a year, but in the meantime the cash went to revitalize Playboy’s balance sheet, paying down debt or simply building a war chest for future ventures.
By the way, that’s twice as much as the investors thought the house and the art collection were worth back in 2011. And from the way the buyer talks, I don’t think he ended up taking the paintings or the furniture. He wants to remodel.
That probably explains why the initial $200 million ask price got cut in half so fast. If we see a posthumous auction of all Hugh’s treasure in the next year or so, collectors will pay a big premium for their piece of the “lifestyle.”
However much cash the memorabilia rakes in, the company is in a much better place now. Even five years ago, the analysts figured Playboy could rake in about $20 million a year in pass-through profit, almost entirely on licensing revenue — the magazine was already practically a writeoff.
If Cooper can turn the magazine around, the family’s share of that annual cash flow turns into nearly $2 million per heir, which isn’t bad at all. It’s actually twice what Hugh brought down as a Playboy “employee” for lifestyle expenses.
Hugh apparently lived pretty large on that paycheck, kicking back about $250,000 a year to his charitable foundation and spending what he wanted to keep the mansion moving. Presumably all his remaining “bunnies” will have to leave now unless he’s provided some form of severance.
Likewise, his young widow is on the deed to her $5 million house and may indeed be eligible for some share of Hugh’s personal estate.
In California, Crystal would have needed to formally waive inheritance rights in the prenuptial agreement. Otherwise, simply “leaving her out of the will” isn’t good enough for the state’s community property rules — unless the will says he’s taking care of her through other channels, half the marital assets are hers.
That may not be much, since the company owned so much of his life and his trusts owned his interest in the company. But it’s not as cut and dried as it may seem.
Either way, the old boss is dead. The mansion is gone. Time to hang up the pipe and smoking jacket and let the next generation sink or swim.