While the stock market appears indifferent to Live Nation's bid for the Warner Music Group's recorded music operation, Wall Street analysts and investors surveyed by Billboard over the past couple of days gave the potential deal a thumbs-down.
Live Nation's stock closed at $10 on March 30, the day before the news emerged about the company's being one of the bidders for the Warner Music Group. The next day, when the news emerged at around 3 p.m. ET, Live Nation's share closed at exactly the same price, before trickling down to $9.98 on April 1.
Meanwhile, the shares of Warner Music Group traded up slightly on the news from $6.54 on March 30 to $6.77 on March 31, and closed at the latter same price on April 1.
Despite their overall misgivings, Wall Street investment executives and analysts concede that some potential synergies could exist in a Live Nation-Warner merger, particularly with regard to "360 deals," or multi-rights deals. In those deals, music companies like WMG and Live Nation have given large advances to artists in exchange for a joint-venture profit-sharing on record and digital sales, merchandising revenue, concert sales, music publishing and other branding initiatives.
Wall Street investors point out that beyond the ability to pocket revenue from those areas, neither company has the broad internal expertise needed to execute on multi-rights deals -- however, together, the two companies have a full set of capabilities, or at least most of what's needed, to add value to the execution of the 360 strategy.
One Wall Street investor said the Live Nation bid on WMG's recorded music assets "certainly makes sense. The music business is facing pressure from all sides -- certainly the touring side had one of its softest years and their continues to be downward pressure on music sales," he says. "In this environment, I would want to control as much of the food chain as I could. And there is significant upside in having many revenue streams."
Moreover, that investor adds that a WMG/Live Nation combination would gain the ability to more fully amortize the cost of developing talent, from the early days of recording a band and underwriting early tours to nurturing the act over time.
But for all the potential upside, the same Wall Street professionals counter that Live Nation's bid would likely be unattractive to the WMG private equity investors because of the regulatory scrutiny that such a deal would face. When Live Nation bought TicketMaster, the regulatory process lasted almost a year. Investors say that with so many suitors -- at least 10 -- bidding on WMG, the company's board of directors would probably choose a discounted bid from one of the other suitors rather than face a year of regulatory uncertainty that a Live Nation offer would likely bring.
Regulatory issues aside, "Live Nation already has more than enough on their plate," complains one Wall Street investor familiar with both stocks. "WMG would be too big a distraction and it won't be worth the payoff. Besides, what about Live Nation integrating what they have already bought?"
In addition to acquiring additional stakes in seven concert promotion companies around the world in the past year, Live Nation acquired a stakes in a number of artist management companies including a 40% interest in B.A.D. Management, a 50% interest in Gellman Management, and a 50% interest in Career Artist Management. It also acquired a 50% interest in SME Entertainment Group (which provides talent and production services for corporate events, private parties and charity functions) and Ticketnet, the second largest ticket retailer in France.
The Wall Street investor quoted above adds that shareholders are growing frustrated with Live Nation's management because the company keeps chasing growth through acquisitions instead of fully rationalizing past acquisitions. "It's a question of execution, and they haven't followed up on their business plans from earlier acquisitions," the investor said.
Tuna Amobi, senior media and entertainment analyst in Standard & Poor's U.S. Equity Research Services, agrees. Live Nation "should focus on stabilizing their [existing] operations, considering the headwinds they have to navigate on [ticket] pricing and [concert] attendance," he says. "I would have thought they would have focused on getting over the challenges from the integration of the TicketMaster acquisition. I don't think they are completely out of the woods, and to throw WMG in to the mix would be a recipe for more uncertainty."
Ben Mogil, a director with Stifel Nicolaus who does equity research of media and entertainment companies, also questions the wisdom of Live Nation acquiring WMG. "The growth of Live Nation has been a result of consumers reallocating their music expenditures from recorded music because of the pricing deflation in that market and piracy to the live event," he says. "This [deal] would fly in the face of those trends."
Finally, Wall Street analysts and investors question whether Live Nation has the financial wherewithal to pull off such a deal, considering its debt covenants. Those covenants require it to maintain a certain ratio of debt to adjusted operating income, which ratchets down over time. Currently, the covenants require debt to adjusted operating income ratio of less than 4.9, and with the ratio standing at 4.2 times the company is in compliance with that covenant. But the ratio drops to a ratio of 4.5 on Sept. 30, 2011, and to 4 times the following Sept. 30, 2012, which means if nothing changes in terms of debt or AOI, Live Nation would be in violation. Also, any addition to debt without an equivalent increase in income might also product a covenant violation.
Currently, "Live Nation has long-term debt of $1.67 billion and adjusted operating income --which is earnings before interest, taxes, depreciation and amortization, excluding stock-based compensation -- of $390 million," or a ratio of 4.2 times, says the Wall Street investor, who follows both Live Nation and WMG.
Even with nearly $900 million in cash on its balance sheet, Live Nation would have to take on "higher debt to pull off a [WMG] acquisition," S&P's Amobi speculates, which could run afoul of the debt to EBITDA requirements of the Live Nation's loan covenants.
The Wall Street investor also has similar reservations. "How would they finance a WMG acquisition?" that investor asks. "They would probably have to refinance their debt, but I don't think the market will accommodate them on that."
In the end, "the idea of having everything in house to do 360 deals seems very good on paper, but beyond that I don't feel the potential synergies of a deal justifies taking on the added risks," says Amobi. "My sense is that [management] now feels that the prospects that led to the Live Nation deal for TicketMaster may not deliver the kind of long-term expectations previously envisioned, but don't think that justifies a bid for WMG."
Spokespeople for Live Nation and WMG declined comment for this article.