Doubts Swirl Around Sillerman's Buyback of SFX Entertainment

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The market is showing uncertainty about chairman and CEO Robert Sillerman's plan to take the EDM roll-up private.

SFX Entertainment's short tenure on the NASDAQ stock exchange has been expected to end this year. But investors are showing skepticism about the current plan to take private the owner of such EDM brands as TommorowLand, Mysteryland and Beatport.

A continuing slide in the company's share price reveals serious doubts about chairman and CEO Robert Sillerman ability to complete the takeover he proposed in February, offering $4.75 for each share he doesn't already own (since upped to $5.25 per share, which we'll explain shortly). SFX shares closed at $3.83 on Tuesday, 27 percent below the offer price. 

The EDM roll-up, an amalgamation of festivals and promoters, has recently provided investors with surprises. Last month, SFX has announced it sold $15 million of stock to two investment companies, suggesting liquidity problems during the busy summer concert season. On Monday, SFX announced it was creating a more localized management structure as well as a global steering committee -- this after the company shook up its executive ranks in January. "It seems the company is in a little bit of disarray," Rich Tullo, an analyst at Albert Friend & Co., tells Billboard.

The current sale has provided investors with more oddities. As detailed in a recent Forbes article, Sillerman hasn't disclosed the sources of financing or equity partners and SFX hasn't yet filed a proxy statement that would illuminate those sources -- both "standard features" of private takeover transactions.

Yet more uncertainty arose from a July 10 SEC filing regarding a two-week extension of the "go shop" period -- a period in which SFX seeks competing offers -- the board's special committee granted to Sillerman. But as Fortune pointed out, the special committee did not explain the reasons it gave Sillerman this extra time.

Numbers can explain the existing uncertainty. Sillerman's original offer was $4.75 per share. SFX shares rose to $5.25 the following day -- the $0.50 difference could probably be chalked up to expectations that a higher bid would emerge. Following investor criticism, SFX shares fell as low as $3.98 in early May. Sillerman upped his offer to $5.25 per share on May 22. Anticipating the ability to sell at $5.25, investors drove up SFX's share price to $5.11 the following day.

But SFX shares have since fallen as investor uncertainty has grown. The spread of $1.41 between the bid and Tuesday's closing price is the numerical value of that uncertainty. Think of it this way: an investor that believed Sillerman's takeover was certain to happen would pay close to $5.25 in order to lock in a guaranteed, yet small, return. However, an investor would pay well under $5.25 if there was doubt that offer price would actually be received. Bond prices work in the same way. The less financially stable a corporation, country, state or municipality, the bigger the discount in the bond price. 

Hedge fund Maglan Capital tweeted it's "tough to expect a deal to happen now" when the share price is so far below Sillerman's bid. SFX's announcement Monday of a new executive structure also caused some head scratching at Maglan. "Looks unusual to do it before buyout completed," the firm tweeted, adding it believes SFX could be selling Beatport separately. (Former SFX president and COO Greg Consiglio was named CEO of Beatport on Monday.)

The impetus behind SFX's creation was correct. SFX is a bet on the financial viability of EDM. While there are stumbles -- deaths at concerts, disappointing attendance at some festivals -- EDM culture continues to grow in popularity. The latest IMS EDM Report estimates the global EDM market has grown to $6.9 billion from $4.5 billion two years ago. 

SFX should be able to ride along with EDM's ascension. But EDM isn't the problem, says Tullo. "It's a management problem."

Correction, Tue. Jul. 28, 9:51 AM ET: This article originally misidentified an article published by Forbes as being published by Fortune.