What Is Big Machine Actually Worth In Its Pending Nine-Figure Acquisition By Ithaca Holdings?

Kevin Mazur/Getty Images for Ithaca Holdings
Scott Borchetta and Scooter Braun pose for a photo at a private residence on June 28, 2019 in Montecito, Calif.

Scooter Braun's Ithaca Holdings is paying upwards of $300 million to buy the portfolio of Scott Borchetta's Big Machine operations. But Is that the total payout?

With Scooter Braun's Ithaca Holdings apparently agreeing to pay upwards of $300 million for Scott Borchetta's entire Big Machine operation, industry deal makers are wondering if that price tag is a final valuation for the Nashville-based company.

While the Big Machine companies may well indeed be valued at the aforementioned price tag, industry insiders speculate it's higher and Billboard's math shows it might range as high as $600 million. But a deal always depends on what amount suitors are willing to pay, not what industry experts think it should be. All things considered, Billboard estimates the range somewhere between the upwards of $300 million amount and $460 million.

Deal valuations depend on any number of financial barometers, including EBITDA (earnings before interest, taxes depreciation and amortization) and due diligence on artist and songwriter contracts.

But scant financial details have been made available beyond what insiders have told the press, with the most common disseminated one being the too vague-to-ascertain actual pricing level. The other financials publicly available is that the entire Big Machine operation produced $40 million in EBITDA on more than $100 million in revenue. And that when the Big Machine deal closes, Ithaca Holdings will have an $800 million valuation.  All of that financial data was first reported by the Wall Street Journal and subsequently confirmed to Billboard by sources.

Before Billboard tries to estimate a valuation for Big Machine's entire operation, let's look first at the two company's financials available to us; and then the assets involved for both Big Machine and Ithaca.

First off, Big Machine's $40 million in EBITDA on more than $100 million in revenue represent the entire Big Machine operation, the label and the publishing. So while Billboard estimates Big Machine's global revenue for its record label operations in 2018 at about $105 million, that doesn't include revenue from the Big Machine Music publishing company, which has a songwriter roster that includes Luke Combs, Jonathan Singleton, Brandy Clark and Laura Veltz. All of the Borchetta labels are included in the pending acquisition: Big Machine Records, the Valory Music Co., BMLG Records and Big Machine/John Varvatos Records.

Regardless, the record label operations probably generate the vast amount of the company's revenue and probably most of the EBITDA. "That's close to a 40% EBITDA, which is pretty breath taking for a record label," says one major label financial executive.

Besides Taylor Swift and her six catalog albums, which combined have sold 32.7 million copies and moved another 14.1 million album consumption units for a total of 46.8 million, the label group has a roster that includes Florida Georgia Line, Thomas Rhett, Reba McEntire, Rascal Flatts, Brantley Gilbert, Lady Antebellum, Cheap Trick, Jennifer Nettles, Justin Moore, Eli Young Band, Brett Young, Midland, Carly Pearce, Riley Green, Aaron Lewis, Badflower and The Voice winner Danielle Bradbery. In valuing Big Machine, industry financial sources suggest that the Swift catalog, which Billboard estimates accounted for one third of the label group's U.S. volume and nearly 48% of its overall global revenue volume, took on an outsized role in the label group's valuation due to its already iconic nature, probably accounting for more than half of the final dollar amount.

Meanwhile, Ithaca Holdings consists of Mythos Studios, created in partnership with Marvel Studios founding chairman David Maisel; the recently acquired Atlas Publishing; and partnerships with Jason Owen's Sandbox Entertainment as well as Morris Higham Management. Ithaca also has an investment in, and partnership with, Aubrey "Drake" Graham and Adel "Future" Nur. In addition, Ithaca houses Braun's SB Projects, which manages such acts as Ariana Grande, Justin Bieber, J. Balvin, Demi Lovato, Tori Kelly, Zac Brown Band, and Dan + Shay. And earlier this year, Ithaca launched Raised in Space, an investment fund "focused on the intersection of music and technology" led by former BMG president Zach Katz.

So by adding in the Big Machine assets, that will bring Ithaca to an $800 million valuation, with the Carlyle Group backing both Ithaca and its acquisition. According to the press release announcing the deal, Carlyle first made an investment in Ithaca in 2017; while it's now making an additional equity investment in the company through its Carlyle Partners VI fund to finance the Big Machine acquisition. But even with both equity tranches, Carlyle is still described as having a minority equity position in Ithaca. Moreover, according to the deal's announcement, "Carlyle will continue to support the combined company's growth strategy" -- read: ready to invest in more acquisitions -- "with Jay Sammons, Head of Carlyle's Global Consumer, Media and Retail team."

So now that we know the scope of the company and its assets, let's try to work-up a Big Machine valuation and see if its upwards of $300 million -- which generally means somewhere between $300 million and $400 million -- as stated, or higher, using the only financial pricing barometer at our disposal -- the $40 million in EBITDA.

Now, we don't know if that $40 million includes any one-time payments -- a publicly traded company will often also provide adjusted EBITDA to eliminate one time events or extraordinary expenses, but having said that caveat, it's time for some math.

Nowadays, music assets trading at a 12 times EBITDA multiple are considered cheap, says one savvy buyer of music assets. So if Borchetta sold his company for $400 million, that implies a 10 times EBITDA multiple. Considering that Big Machine's assets include the iconic Swift catalog, that price tag is leaving money on the table, remarks a Wall Street investment banker who sometimes works with clients selling music assets.

But all financial sources interviewed for this story agree Borchetta is obviously no fool, so most of them are speculating that the announced pricing of upwards of $300 million covers an upfront payment, not the full valuation for Big Machine.

"I can sell my investors on that type of assets [as the Big Machine properties] on a 15 times EBITDA easily and they wouldn't even blink an eye," says the savvy music buyer. "Even at a 15 times multiple, with the way the industry is growing now, that turns into having paid a 9-11 times multiple within five years."

But Lisa Alter of Alter, Kendrick & Baron cautions that while stand-alone music assets may trade at a 15 times EBITDA multiple or higher, companies tend to trade at somewhat lower multiples than a single music catalog. And final pricing also depends on demand on what other suitors bid.

Still, most financial sources contacted by Billboard suspect there is a payout for Borchetta and his investors beyond what's been announced so far. In fact, the initial press release itself, with some convoluted wording, hints at that too.

The release announcing the deal says "Borchetta will join the Ithaca board, [and] acquire a minority interest in Ithaca…" More likely, Borchetta is also being paid in Ithaca equity in addition to whatever cash is paid upfront to Borchetta and his investors, which include a 4% stake to Taylor's Swift's father, Scott, and 4% stake by Toby Keith. In the past, Billboard has reported Borchetta's stake in Big Machine at 60%, so it's unclear who owns the other 32% of Big Machine and if these percentages apply just to the label operations; or all three of Borchetta's companies.

As part of the deal, Borchetta will stay on as president and CEO of Big Machine so he will work in tandem with Braun to build the company's assets, making for a formidable one-two executive punch that could produce an even bigger reward down the road.

"If I was doing that deal, and Borchetta wanted to stay on, I would structure the payment so he is handcuffed to the company for another two or three years by making him keep an equity stake," says the music asset buyer. This way Borchetta has "skin in the game" and an incentive to improve performance and the overall valuation of Ithaca. That executive suggests he would have required Borchetta to hold onto a 15%-20%-25% stake in Big Machine.

So very likely when the deal closes, based on the wording of the announcement, it sounds like Big Machine investors will all be cashed out with the remainder of the upfront cash going to Borchetta, who will also be paid in Ithaca shares.

But how much of a stake? Again, let's do some math.

A 12 times EBITDA multiple suggests a Big Machine valuation of $480 million; a 15 times multiple suggests a valuation of $600 million. But let's not forget Alter's observation that companies trade at lower multiples than catalogs before we do any math; and let's weigh whatever math we do against other things we know.

So besides the announcement that Borchetta will have a minority interest, the executive himself told his employees in an e-mail to the staff, that he is "now a Board Member for Ithaca Holdings and I am a significant, but minority, shareholder in the company."

Referring back to the music asset buyer who would structure a deal with a back-end, performance-based payout in a deal for a company like Big Machines, let's picture Borchetta has a 15%-20%-25% stake in the company; and let's try those percentages on for size.

With an $800 million valuation for Ithaca, that translates into $120 million (15%); $160 million (20%); and $200 million (25%) respectively. So if Ithaca paid upwards of $300 million and that truly is, as speculated, a front-end payment, the Borchetta equity stake could imply a valuation of upwards of $420 million to $500 million for Big Machine.

And now compare the potential valuations by EBITDA multiples, $420 million (10.5 times EBITDA); $460 million (11.5 times EBITDA) and $500 million (12.5 times EBITDA). Admittedly, this is all guess work and the deal could be for the amount as announced, upwards of $300 million -- with the final amount just depending on due diligence. But  music industry asset traders who wheel and deal selling and buying music catalogs suspect otherwise based on the known financial information from the deal.