Wednesday is the deadline for SFX Entertainment to accept bids from third parties on parts of the EDM roll-up or the entire company. It's difficult to pick one outcome from a range of likely scenarios. But what happens after Wednesday could greatly impact the live music business and change the face of the dance music industry.
SFX has been pure business theater in 2015. The company announced in February it had received a bid by chairman and CEO Robert Sillerman to take the company private by buying what shares he didn't already own. There were changes to upper management in both January and July. Insiders described to Billboard an unruly corporation that grew too quick and had too little oversight. The board of directors solicited competing bids but investors were interested only in parts of the company rather than the entire company. The deadline was extended two weeks, but came and went.
Liquidity problems have been ever present. To shore up its balance sheet, SFX was forced to sell equity at favorable terms to two investors. After the deadline came and went, SFX was forced to line up $90 million in financing. SFX now has breathing room but faces an uncomfortable next step: push forward, sell asset or sell the entire company?
Investors have less reason than normal to expect a sale of some sort of sale, Rich Tullo, an analyst at Albert Fried & Company, tells Billboard. "There's a credibility gap," says Tullo about the trust lost by SFX management's actions. Nevertheless, Tullo believes the company is undervalued has a price target of $4. The stock was trading at 89 cents per share on Tuesday afternoon.
There's no telling what will happen next, but here are five plausible scenarios.
1. SFX sells assets either before or after the go-shop period ends. "Most probable is they sell some of their assets," says Tullo, who puts the odds at 60 to 70 percent it will happen by the end of the year. This seems like a likely outcomes since SFX had already received interest in some business segments when soliciting bids for the entire company.
What could be on the block? Only "non-core assets," the company says. It could part with Beatport without harming its core promotion business; insiders say Beatport has a strong brand and will survive in any ownership situation. Not only would that strong brand help Beatport fetch a good price, there are numerous potential buyers that might want a download and streaming service with deep relationship in the EDM community as well as a deep catalog. A sale would mean SFX loses Beatport's potential to help ticket sales of SFX events. But a good price would greatly help SFX ease its financial burdens while keeping the businesses it needs most.
SFX could also part with one or both of its two ticketing services, Paylogic and Flavorus. Paylogic is focused on the European market, while Flavorus has a long history within the EDM community and fits well with SFX's business. Ticketing is helpful to a large music promoter -- larger promoters Ticketmaster and AEG both have ticketing arms -- but ticketing is not critical for a financially distressed music promoter. And given the price Pandora paid for Ticketfly -- $450 million for a company with a $70 million run rate -- SFX might get a good price from one or both.
2. Nothing happens. The previous go-shop period ended in August without a bid from either Sillerman or a third party. The same could happen this time. SFX can do nothing because it recently secured financing. What's more, the current 95-cent share price suggests investors are not betting on a favorable outcome. Instead, the share price indicates SFX has a long, tough slog ahead.
3. An outside investor acquires SFX. In this context, an outside investor is a company such as a private equity group or investor that's not a music company. Private equity firms tend to invest in distressed or undervalued companies with the goal of installing financial and operational discipline in order build value and, at a later date, exit the company at a profit. (As an example, see Terra Firma's purchase of EMI Music in 2007.) It's like flipping a house -- only far more complicated.
4. A competing promoter acquires SFX. It's an unlikely scenario. There are a small number of candidates that could buy SFX and fold it into an existing business. Live Nation, AEG and MSG Entertainment come to mind. But the main question mark here is the degree to which SFX's corporate culture can fit with the culture of the buyer.
5. SFX fails to find a buyer and goes bankrupt. This outcome is unlikely since SFX secured $90 million in financing at the beginning of the month. At the very least the financing provides SFX some much-needed time to figure out a plan. And while SFX may be in financial trouble, it has a number of strong brands it can sell to pay down its debt and, perhaps, leave some cash for operations.