Shares of SFX Entertainment were trading at $10.84 at midday Wednesday, about 16.5% below the $13 initial public offering price.
 
SFX offered 20 million shares priced at $13.00 a share, raising $260 million and valuing the company at just over $1 billion. Its shares, which trade on the NASDAQ Global Select Market under the ticket "SFXE," reached a high of $13.39 before falling more than $2 to a low of $11.19.

SFX Entertainment Raises $260 Million in IPO Pricing; Company Valued at Over $1 Billion

While the IPO was successful in attracting investor interest and raising a substantial amount of money, the drop in share price is a troubling sign for the EDM-focused company. The share price reflects the market's opinion of the company. As the share price drops, the market is telling SFX its IPO price was too high.
 
Wall Street has good reason to be skeptical of music companies. Music is a high-revenue, low-margin business. Over the years, Wall Street has seen publicly traded Napster, Pandora, Warner Music Group and Live Nation struggle to reach profitability. Others, like MP3.com and SpiralFrog, ended in failure. Companies that pay for content -- Napster, Pandora and Live Nation -- end up with low margins and need strong, sustained growth to make their business models work. A content creator like Warner Music Group must deal with a challenging business in a difficult state of transition.

For the most part, companies are judged on their own merits. (A company's shares can rise of fall along with comparable companies and changes in broader market conditions, however.) In SFX, investors have a financial bet on the long-term viability of EDM culture and today's music promotion business model. Bulls will buy into the argument that EDM can be the cornerstone of a successful business. Bears may question EDM's viability and will note SFX's competition and margins.
 
Music companies need to educate investors and analysts on their business models. SFX will be helped by the fact that Live Nation has spent years explaining the music promotion business to Wall Street. Live Nation is the publicly traded company most like SFX. At the time of its IPO in December 2005, Live Nation had annual revenues of roughly $2.6 billion -- nearly three times that of SFX -- and a business model not unlike that of SFX today. Although the Live Nation of old was diversified -- it had sports and theater divisions in addition to music -- the company was tightly focused on promotion.
 
Over the years, Live Nation diversified and added components SFX doesn't have. In 2010, Live Nation merged with Ticketmaster, adding a lucrative ticketing business and the artist management division that would become Artist Nation. The ticketing and promotion help reinforce one another: Ticketing clients are lured and retained by the ability to host Live Nation tours. Live Nation has also built a strong sponsorship division that contributes nearly a third of the company's adjusted operating income. SFX has yet to build a sponsorship business, although it plans to do so.
 
For the onlooker who doesn't plan on investing in SFX, Wednesday's IPO and the SEC filings that preceded it help provide additional insight into the music business. SFX joins a small group of music-related companies, nearly all of them publicly traded, whose publicly available financial statements shed valuable transparency on various segments of the music business. Live Nation went public in 2005. Pandora is also publicly traded, on the New York Stock Exchange. Warner Music Group still makes its financial statements available to bondholders even through it ceased trading on the NASDAQ after its acquisition by Access Industries in 2011.
 
Other publicly traded companies are tangentially related to music. While Apple has the world's biggest music store and, as of last month, a fairly popular Internet radio service, music has a very small impact on Apple's financial performance. Rather than offer specifics about music-related revenue, Apple's financial disclosures provide insights into revenue from the hardware products that drive its profits. Google and Amazon are also major players in music but, for reasons similar to Apple's, don't reveal details about its music-related operations.

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