What the Stock Market Declines Mean to Music Companies
— Concerns about the U.S. debt and hints that the U.S. economy has entered a double-dip recession are dragging down stock markets and impacting music and entertainment companies. New consumer spending numbers combined with U.S. debt concerns to send the Dow Jones down 2.19% — its eighth straight day of decline – and the Nasdaq down 2.75% Tuesday.
One reason for the markets’ decline – an important factor to media and entertainment companies – was a dour release by the Department of Commerce’s Bureau of Economic Analysis. Figures released Tuesday showed personal income had grown just 0.1% and personal expenditures fell 0.2% in the month of June. It was the first time in two years consumer spending had decreased. Retailers are certainly aware of the difficult conditions, but now they have greater evidence of the depth of consumers’ woes.
Many companies tied to consumer spending on out-of-home entertainment fell sharply Tuesday. Live Nation’s sizeable 3.86% drop was exceeded by some well known names: online travel service Orbitz (down 7.94%), Vail Resorts (down 4.51%), Royal Caribbean (down 4.73%), Redbox owner Coinstar (down 7.06%) and Life Time Fitness (down 5.2%).
Pandora Media appears to be in the midst of an unrelated tailspin. The company’s stock dropped 2.51% to $13.96. It has fallen 22.57% in the last five trading days and 18.98% over the last two weeks. The decline has likely been driven not by macroeconomic factors but by concerns about the company being an overvalued dot-com, its mobile advertising prospects and competition from other music services. On-demand service Spotify launched in the US in July and Sirius XM posted strong second-quarter results Tuesday, showing that Pandora has considerable competition in the automobile category. In addition, the fact that many analysts have a target price under the current trading price may finally be sinking in with investors.
Lower stock prices impacts everything from executive stock options to companies’ access to capital markets. With a lower stock price, stock options will be worth less or could fall out of the money. A lower stock price also hinders a public company’s ability to tap the markets to raise capital. In such a case, a secondary stock offering generates less revenue for the sale of the same number of shares.
Lower stock prices also make companies less expensive to acquire. The S&P 500 has dropped over 4% since Warner Music Group accepted Access Industries’ bid. It doesn’t impact Warner since the $8.25-per-share price was locked in before the markets started fall. But on a $3.3 billion value on May 6, that equals a drop of $132 million in fewer than three months.
$4 Billion for EMI?
— Bloomberg estimates EMI could fetch up to $4 billion when it is sold by Citigroup. That’s $1 billion more than the enterprise value in Access Industries’ acquisition of Warner Music Group and up to $2 billion more than a Fitch estimate from January of this year.
Here’s the math: Bloomberg started with an earnings estimate of Berstein analyst Claudio Aspesi, who believes EMI’s earnings before interest, depreciation and amortization (EBIDA) has fallen from 10% to 20% since the company reported EBITDA of 334 million pounds for the fiscal year ended March 31, 2010. Bloomberg then converts pounds into dollars and reduces the product by 20% to account for the drop in EBITDA estimated by Aspesi. With that EBITDA estimate of $433 million Bloomberg multiplied the 9.2 times EBITDA multiple from the Access bid for Warner. That comes out to $4.048 billion.
A $4 billion bid would reflect healthy optimism in music assets. And right now there is room for optimism. Investors can look to anti-piracy measures – market-driven or government-led – in numerous countries for some confidence that music assets will retain their value. They can look to an upswing in the U.S. market. Album sales are up 1% and tracks are up 11% through July 24, according to Nielsen SoundScan. And now that Spotify has launched in the US, some investors might feel confident that technology companies and rights holders have finally found enough common ground to fuel growth in new digital business models. Of course, they would be remiss to gloss over the great uncertainty surrounding the physical music market that still accounts for most recorded music revenue.
In any case, Citigroup may want to hurry up and sell while optimism is in fashion. “Valuations will still be fairly optimistic,” Bernstein analyst Claudio Aspesi told Bloomberg. “You might as well try to sell it while people are interested and still conversant in the dynamics of the industry.”
Go Easy on Facebook’s New Feature, Moontoast Warns
— Facebook has a new feature, but social commerce startup Moontoast warns its users not to overdo it. The feature, debuted this week, allows users to post photos and videos in comments just by adding a URL. This means social commerce can be inserted into comments, too — but Moontoast urges people not to go on a store-dropping binge.
“If you’re thinking about searching for mentions of your product, then casually commenting with a shop, pump the brakes. While this new ability might have you itching to sow stores across any mention of your brand or related content, please be civil about how you sell. If it’s appropriate, great, new fan and transaction all in one. Just please don’t abuse this newfound power for the sake of your brand’s reputation.”
A better option would be to selectively drop a store into comments as a reward for people discussing your product. “Follow conversations and sneak into them with some crazy surprising offer just for people being cool enough to chat about you. If you have digital goods, consider giving something away as a goodwill gesture.” ( Moontoast blog)
Facebook Purchases Push Pop
— Facebook has purchased digital book software company Push Pop Press for an unspecified sum. The company creates publishing technology that allows books to incorporate media (texts, images, audio, video, interactive graphics) in new ways. “Now we’re taking our publishing technology and everything we’ve learned and are setting off to help design the world’s largest book, Facebook,” the company’s co-founders wrote at the Push Pop Press web site. There is no word on what exactly Facebook will do with Push Pop’s technology, but quite a few tech writers reacted with disgust that the creator of such innovative publishing software was going to a social network with no interest in the publishing business. (Push Pop Press website)