Was Blackstone's SESAC Acquisition a $1 Billion Deal?

Courtesy of Sesac
         

2017 started off with a bang for the music business: Blackstone's Core Equity Partners fund acquired SESAC in what might well be $1 billion deal. That's the rumored price tag floating around the industry. Who knows if the rumor is true, but here we will look at SESAC's financial numbers to see if that price is feasible.

First off, we know that at the beginning of 2013, Rizvi Traverse Traverse paid $591 million to acquire a 75% stake in SESAC, leaving legacy investors -- Stephen Swid, Allen & Co., entertainment lawyer Freddie Gershon and Ira Smith -- and management with a 25% stake. Extrapolating from there, that means that deal carried a total valuation of $788 million.

During its ownership term, Rizvi Traverse's stake had risen to 82%. So in addition to Rizvi Traverse, Blackstone also acquired the legacy investors leaving SESAC management -- which is expected to remain in place led by chairman/CEO John Josephson -- with an undisclosed stake.

At the time of the Rizvi Traverse acquisition, SESAC had produced $59 million in earnings before interest, taxes, depreciation and amortization on revenues of $167 million in 2012, according to SESAC financial information provided in an April 2014 credit report authored by Moody analysts Gregory Fraser and John Diaz. By 2015, revenue had grown to $206 million, according to the April 2016 credit report they issued. That report didn't say what EBIDTA was, but it did say that SESAC had a 7.4 debt to equity ratio. The report also listed four different credit facilities, not including the revolver, which totaled $572 million. The 7.4 ratio on $572 million in debt works out to about $77 million in EBITDA.The report further said that SESAC's EBITDA going forward is expected to remain in the range of 30% to 35% of revenue.

Since the Rizvi Traverse acquisition, SESAC has acquired Rumblefish, a synchronization licensing company, in 2014; it paid $17 million to acquire the Harry Fox Agency, the mechanical licensing collections organization in September 2015; in April 2016 it acquired Christian Copyright Licensing, which administers licensing to 250,000 churches worldwide; and in August in formed a pan-European licensing operation Mint Digital Licensing with SUISA, the Swiss collection society.

Currently, about $400 million to $500 million in revenue collections flow through SESAC and all of its acquisitions and operations, a knowledgeable source says. But in the performance and collection organizations world, there is collections and there is revenue, and that isn't always the same thing. So one year after Moody's placed SESAC's revenue for 2015 at $206 million, its analyst Fraser is quoted in a story on the Blackstone acquisition in the Tennessean as saying that SESAC's annual revenue, probably 2016, was $248 million.

If that's the case, what's EBITDA? Remember the expectation that SESAC's EBITDA would stay at 30% to 35% of revenue? With revenue quoted at $248 million, that multiplies out to a range of $74.4 million to $86.8 million.

But we know that in 2015, SESAC's EBITDA was already $77 million, and that was only with a few months of owning HFA, and without all the other 2016 deals, so lets eliminate the bottom range from above. Meanwhile, a Wall Street source who has looked at SESAC financials suggests that between the synergies (i.e. duplications that result in savings when eliminated) with the Harry Fox Agency, and with what it's extracting from its other newly acquired asset and joint venture, SESAC probably realized about $8 million in additional EBITDA in 2016, for a total of $85 million. That's near the top of the range above so lets go with $85 million in EBITDA at the time of this latest acquisition.

This $85 million in EBITDA on $248 million in revenue in 2016 tells us two things: That SESAC has practically doubled in size from the $41 million in EBITDA on revenue of $128 million the company garnered in 2011, while being owned for four of those five years by Rizvi Traverse, which further tells us that the SESAC transaction wasn't a fire sale because the company has been very successful.

This brings us back to our opening question: How much did Blackstone pay? For sure, Rizvi Traverse made a profit on the company, which carried a $788 million price tag when bought in early 2013. When asked to speculate, financial sources didn't know the price but had heard the rumor, and of those, some suggested that Blackstone paid an 8 times EBITDA multiple, but others say a 10 times multiple is more likely. Those two multiples on EBITDA of $85 million work out to $680 million and $850 million.

First off, Rizvi Traverse would likely never sell at $680 million, because that would almost look like a loss of $108 million -- almost because during Rizvi Traverse's ownership, SESAC paid down debt by $133 million from $572 million quoted in Moody's April 2016 credit report for the company to $439 million quoted in the Moody report issued on the day of the sale, which would produce an overall profit of $25 million.

While it's unclear how much equity Rizvi Traverse put in and how much debt it added to the company's balance sheet when it paid $591 million in early 2013, a 10 times EBITDA multiple would produce an $850 million price tag to Blackstone; and would likely allow all the now-remaining debt of $439 million to be paid off and leave a nice, $195 million profit for Rizvi Traverse and the legacy investors. The $850 million is is what most seasoned industry investors believe is the likely price, because they are betting the deal carried the 10 time multiple.

But that price is still not the more than $1 billion price tag rumored around the industry. While music industry financial executives think that a 10 times EBITDA multiple is the upper limit that SESAC is worth, a $1 billion price tag works out to about 11.7 times EBITDA. That's not an unreasonable multiple when you consider past SESAC history.

Remember, SESAC had $59 million in EBITDA in 2012 when Rizvi Traverse bought the company in an early 2013 transaction valued at $788 million. That's a 13.4 times multiple. When you look at it from that perspective, a 12 times multiple for SESAC, which would give the Blackstone deal a price tag of $1.02 billion, isn't really that outrageous a price after all.

The good news about the Blackstone acquisition is that the fund the financial firm used to make the acquisition -- Blackstone's Core Equity Partners with a reported $5 billion piggy bank -- has a long-term investment horizon of about 10 years. With the deep-pocketed resources of a patient owner like Blackstone now in a publishing world experiencing disruption as performance rights organization look to diversify into other areas of licensing as well as break down geographic boundaries, SESAC emerges as the company to watch. Yes, that more than $1 billion price tag is beginning to look downright reasonable when you consider the opportunities at SESAC's doorstep.


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