EDM's Dead, Long Live... EMC? SFX's IPO Looms Large While the Industry Sells Out (From the Magazine)



Sillerman, whose track record in raising funds for his previous businesses is unrivaled by many accounts, hasn't had an easy run in his latest iteration of the SFX brand. In 2011 he raised some $50 million from a group of investors that included Ron Baron of Baron Capital and others at a valuation that one person said was around $500 million. That helped to get SFX and its EDM vision off the ground in conversations with any number of potential acquisition targets, and by mid-2012 Sillerman had committed to acquisitions including Disco Donnie and Life in Color.

By the end of the year it was time to return to the well for more funding. But this time, new investors balked at the valuation and the lack of Sillerman committing his own funds, according to a person familiar with the funding talks.

In the meantime, acquisition targets grew restless -- they had signed agreements with Sillerman but those deals couldn't be closed without him paying out cash.

As industry whispers began to spread that Sillerman might not be able to meet his commitments, the first public sign of trouble came from another of Sillerman's media investments. Viggle, a publicly traded social TV service for which Sillerman is the chairman, announced last November that it had reached a $25 million deal to buy GetGlue, a well-regarded leader in the social TV space. But in January, Viggle and GetGlue surprisingly called the deal off. It's unusual for a publicly traded company to announce a sizable deal and then pull out with little or no explanation.

But Sillerman still had some tricks up his sleeve. In March he pulled off a big coup to get WPP, the world's largest ad agency holding group, on board with a $10 million strategic investment.

After weeks of discussions, Sillerman reached a deal for a $65 million lien of credit for SFX in June. The commitment was only reached after a personal guarantee by Sillerman when the lenders demanded extra collateral, according to sources.

The new revolving credit facility is conditioned on the completion of the public offering and would close concurrently with the IPO. In other words, if the IPO flopped or the company collapsed in a year, Sillerman would be liable to pay up to $65 million to the banks. In 2005, he was ranked by Forbes as one of the 400 richest Americans, with a net worth of $975 million, but that's no guarantee he has $65 million in cash lying around today.

Not surprisingly, the IPO filing also says the company is still searching for acquisitions.

"We intend to continue to acquire additional companies in the live events and consumer Internet industries, and we are currently in the process of exploring a variety of financing options in conjunction with consummating further acquisitions," the filing states.

Sillerman could not comment for this story due to the Securities and Exchange Commission's required "quiet period" ahead of the offering.

SFX expects to raise $175 million from the offering, though the stock will be priced in the coming weeks on Wall Street after an investor road show. If things go according to plan, SFX should do well, at least in paper valuation terms, given retail investor and Wall Street enthusiasm for stocks that tap into youth culture and consumer Internet trends. Currently, the closest proxy as a public stock is Live Nation, but even though they're both in live entertainment they should be viewed as fundamentally different businesses. For one thing, the world's top concert promoter is a mature business with slim margins in its core concert/ticketing business. The Live Nation stock is doing well now after surviving a controversial 2010 merger with Ticketmaster and being badly hit by the global recession. It now trades at a high multiple of more than eight times 2014 earnings before interest, taxes, depreciation and amortization (EBITDA).

But as a startup, or roll-up, SFX won't be measured on the same financial metrics, at least probably not until about 2015 as the business settles down. It's also primarily in the festivals business, which has traditionally higher profit margins than the big artist-driven concerts that dominate Live Nation's roster.

Rich Tullo, an equity analyst at Albert Fried & Co., believes investor interest in SFX will be greatly affected by whether EDM is a fad or a long-term business opportunity. Live Nation already has a presence in the space, but "competition is pretty much wide open," Tullo says.

However, SFX's success won't be determined by its ability to compete with Live Nation, he adds. The greater question is if SFX can succeed through scale, efficiencies and management. In other words, will SFX be able to take advantage of the potential within the company it has built? "The business opportunity is viable," he says. "Execution will always be a challenge."