A lawsuit against EDM promoter SFX Entertainment is seeking compensatory damages for "false and misleading statements" regarding an effort by CEO and chairman Robert Sillerman to take the company private. The complaint, filed on Sept. 11 by New York firm Abbey Spanier LLP, claims investors were deceived about Sillerman's intent to acquire the company and suffered economic losses when the proposal lapsed and SFX's share price plummeted.
Sillerman's proposal to buy the SFX shares he doesn't already own was accepted by a special committee of the board of directors but failed to result in either an acquisition by Sillerman or a competing bid. The complaint, a copy of which was obtained by Billboard, claims to represent the class of investors that purchased SFX common stock between Feb. 25, the day Sillerman's proposal was announced, and Aug. 17, the day Sillerman reaffirmed his intention to buy back SFX.
Edward S. Gutman, the lead plaintiff, purchased 42,000 SFX shares between May 27 and Aug. 17 at an average price of $3.56 per share. SFX shares closed at $1.33 on Aug. 17 and stood at $0.45 on Monday (Sept. 14).
The lawsuit calls Sillerman's acquisition proposal a "sham process" designed to make SFX an attractive candidate to a third-party purchaser and maintain the share price before it was caught by its liquidity problems. Sillerman and the defendants "knew or recklessly disregarded that SFX was in precarious financial condition and that it could not support a $774 million going forward enterprise value," the complaint reads.
Sillerman, as well as board members D. Geoffrey Armstrong, John Meyer and John Miller, are named as defendants in the complaint. Armstrong, currently CEO of 310 Partners, co-founded SFX Broadcasting with Sillerman in 1993 before selling the company to Capstar for $2.1 billion. Miller and Meyer are also board members of Viggle, an entertainment rewards platform of which Sillerman is executive chairman and CEO.
In February, Sillerman announced his plan to take SFX private at $4.75 per share, a 44 percent premium over the previous day's closing price. After investors and analysts criticized the offer, Sillerman increased the proposal to $5.25 per share.
But the complaint contends Sillerman made "materially false and misleading" statements when he guaranteed the acquisition price would be "a substantial premium" to the share price at the time. It contends Sillerman knew and failed to disclose that he did not have financing in place and he could not obtain the necessary financing to complete the $275 million stock purchase.
What's more, the complaint says Sillerman's original $4.75 offer price set a floor for the company's market value and gave investors "the false impression that these shareholders would continue to own a security that was worth at least $4.75 and Sillerman would be able to finance the transaction."
Abbey Spanier also takes aim at SFX's financial statements. It contends SFX's full-year guidance given in March -- revenue over $500 million and $60 million of earnings before interest, taxes, depreciation and amortization -- was false and misleading and the company knew or disregarded that SFX's debt was increasing, cash was running low and ability to borrow money was limited.
Liquidity issues have arisen this year. The company revealed in a footnote to its first-quarter earnings that Barclays and SFX had amended the company's revolver credit to require SFX place a 105 percent deposit on any borrowings. Its second-quarter earnings release noted that SFX had extended the payments of earn-outs to some acquired businesses, effectively conserving cash by delaying contractually required payments. In June, SFX sold shares worth $10 million to two hedge funds -- at favorable terms -- and another $5 million in equity to Sillerman. Two months later, SFX-owned Beatport put a hold on royalties payable to record labels for downloads and streaming.
A month later in July, SFX extended the "go shop" period for two weeks to give interested parties more time. Disappointing second-quarter earnings, the failure of Sillerman's proposal and the absence of a competing bid sent SFX shares spiraling. Priced at $3.82 before a Stifel analyst downgraded the stock, the share price fell to $1.38 after the company announced it was exploring "strategic alternatives" for its future.
Sillerman is already subject to a lawsuit by three men claiming he took their ideas for building SFX and reneged on an agreement to provide them equity in the new company. The plaintiffs scored a victory on July 29 when the judge in the case denied Sillerman's request for summary judgment. Sheldon Finkel, SFX's chairman of strategy and development, is also named as a defendant.