SFX - Where's The Value Gone?
5 Reasons Why The World's Leading Electronic Music Company Finds Itself in Financial Trouble
by Kevin Watson, Danceonomics.com
Just under two years ago a company called SFX Entertainment became the first Electronic Music company to complete an Initial Public Offering. In October 2013 it raised an estimated $260m selling shares at $13 each, which valued the business at over $1 billion. Currently, in September 2015, the share price stands at less than $0.50 - a fall of over 96%.
So what’s gone wrong? I assess five potential causes…
1. Was there a downturn in the market?
First of all it’s interesting to compare the stock performance of SFX to the market overall and related businesses. Figure 1 below shows the performance of the index which SFX is part of (the Nasdaq) and that of one of it’s biggest competitors – Live Nation. The chart begins in October 2013 – when SFX first listed stock at $13 a share – and ends with the most recent week.
As you can see, despite the recent downturn, both the Nasdaq and Live Nation gained over 30% in value during the period. This suggests overall market forces were not a significant contributor.
Looking more specifically at the electronic music industry, the 2015 IMS Business Report estimated that growth has been over 50% since 2012/13 – see Figure 2.
The industry is now estimated to be worth $6.9 billion and given the strong growth, is unlikely to have significantly contributed to the sharp fall in the share price of SFX.
2. Has SFX failed to deliver financial results in line with the IPO price of $13 a share?
When SFX shares began trading on 9th October 2013 at $13, the company was valued at c.$1 billion. It is difficult to assess whether this valuation was reasonable given the operations of SFX and the industry it operates in. One methodology that can be used is to compare the ratio of company value to EBITDA (Earnings Before Interest, Tax, Depreciation & Amortisation) – a measure of operating cash flow, to that of other similar companies. Given that many competitors in the Electronic Music industry do not disclose detailed financial data, Live Nation Entertainment, Inc. is being used as the comparator company.
Using up-to-date financial data, the Market Capitalisation of Live Nation (currently $5.1 billion) is approximately 10 times the EBITDA it generated in the most recent 12 month period ($507m). Using the same multiple of 10, and applying it to the Market Capitalisation of SFX at the point of IPO (c.$1 billion) equates to SFX EBITDA being c.$100m – see Figure 3.
Figure 3 shows the actual EBITDA generated by SFX in 2013, 2014 and the 12 months to 30 June 2015. Whilst this methodology is not meant to provide a definitive calculation of expected EBITDA, it is clear to see that the IPO Multiple Comparison of $99m is significantly above the most recent annual EBITDA achieved of $(85)m. This does suggest there is some evidence of financial performance being significantly below that expected at the time of the IPO.
3. Did SFX overpay for assets in a competitive market place?
Since the inception of SFX in 2012, the company has made a large number of acquisitions. The company has publicly stated the desire to acquire companies operating in the Electronic Music industry, and appears to have faced competition from other potential buyers in some cases. One such case was the acquisition of ID&T, who organise many well-renowned festivals across the globe, including Tomorrowland in Belgium.
It is challenging to assess the ‘fair’ market price for a company such as ID&T, but once again a multiple comparison can provide an indication. In this case, Live Nation Entertainment, Inc. multiples of Enterprise Value (EV) and Market Capitalisation (Market Cap) to EBITDA have been used. These have been compared to the multiple of ID&T purchase price to EBITDA in the last full year before any deal with SFX (2011) – see Figure 4.
Whilst the multiples in both cases are from different time periods and reflect slightly different definitions, the ID&T multiple of 32 is significantly higher than the Live Nation multiples of 10 (Market Cap / EBITDA) and 11 (EV / EBITDA). This hints that SFX paid a relatively high price for ID&T compared against the earnings it was generating prior to the acquisition.
4. Have the assets that SFX purchased underperformed?
One of the first assets purchased by SFX was the electronic music download site Beatport in February 2013 for a reported $50m. Whilst no revenue figures have been published, Beatport has continued to enjoy strong growth in registered users – see Figure 5.
In addition to Beatport, SFX also purchased a number of festival brands, including those owned and run by ID&T, such as Tomorrowland in Belgium. The most recent set of Financial Results released by SFX in June 2015 shows that between Q2 2014 and Q2 2015 repeat festivals generated significant attendance and revenue growth – see Figure 6.
With Beatport adding 15% more registered users YoY in 2014, and key festivals generating a YoY increase in revenue of 11%, it appears that the core assets of the business have remained strong. Hence this also does not appear to be a significant driver of share price performance.
5. Has SFX management successfully integrated the businesses?
When acquiring and merging a number of different companies there are some key levers to generate value and above and beyond the simple sum of the parts. These include centralisation operations, sharing best practice and customer data to sell more and harnessing industry expertise to drive the business.
Analysing the most recent set of financial results from SFX hints at different levels of success across these different areas – see Figure 7.
Firstly, Selling, General & Administrative (S, G & A) Expenses have remained relatively flat year on year at c.$40m, and therefore fallen significantly as a percentage of revenue – from 51% in Q2 2014 to 33% in Q2 2015. This suggests HQ costs have been controlled whilst the business has grown.
Gross Profit, however, has only increased marginally year on year (9%) despite revenue growth of nearly 50%. The increase in direct costs of over 60% has significantly impacted gross profit margin, causing it to fall from 25% to 18% year on year. There could be other factors at play, such as phasing of new investments, but this could also point to limited progress in combining the costs of the individual businesses.
Recent developments, including the creation of the Audience Insights Group in April 2015, and a joint T-Mobile partnership across Beatport and a number of festivals in August this year point to further knowledge and data sharing across the businesses. It is unclear, however, how much value this will create and how quickly.
Are there any other factors that have impacted share price?
It is challenging to assess all the potential causes of the significant fall in SFX Entertainment ‘s share price. Here I list a number of other events that could well have had some influence, but which do not form part of the detailed analysis of this article:
· In February 2015, press reported that Robert F.X. Sillerman had made an offer to take SFX private, offering to buy all outstanding shares at $4.75 each. In May 2015 reports confirmed the deal would take place at $5.25 per share. In mid August an announcement was made that the deal would not be taking place, and other ‘strategic alternatives’ were being assessed
· Duncan Stutterheim announced in April 2015 that he would be leaving ID&T and SFX this Summer. Stutterheim led the ID&T business for 23 years – a key part of SFX’s asset portfolio
· In late August 2015 it was announced that some live event vendors had demanded up-front cash payments from SFX, impacting company liquidity
In summary, market conditions and the performance of key SFX assets do not appear to have driven a significant proportion of the share price drop over the past two years. However, there is more evidence to suggest that a failure to deliver financial results in line with expectations at the time of the IPO could well have contributed to the fall. Other contributing factors could have been a high price paid for assets at the time they were acquired, and minimal financial benefits from the integration of those businesses since.
Note: this article is intended to be a fact-based assessment of SFX Entertainment since it’s IPO in October 2013, and should not be used to inform judgements of future financial results or share price performance. Kevin Watson is an independent analyst working in association with Danceonomics.com and as such these views represent his and those of Danceonomics only.
