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SFX’s Woes: Company Defaults on Spotify Deal, Loses a Good Company and Major Exec Prospect

SFX has unloaded management TMWRK, defaulted on a $10 million deal with Spotify and lost a major executive hire -- what's next?

SFX chairman and CEO Robert Sillerman’s troubled dance event company has defaulted on its content agreement with Spotify, refunding the $10 million licensing advance first announced this past summer. Spotify, which will recoup the amount in installments by July 2016, can recoup its advance because the contract called for Sillerman to purchase $15 million in preferred stock by October 17th. Sillerman’s failure to make this payment caused SFX to default on a $30 million credit agreement with Barclays Bank and other unnamed lenders, who could at any time declare all funds due immediately.

According to SFX’s SEC filing, the default would cause “a cross-default” on a $295 million loan. Those lenders could similarly demand immediate repayment. The lenders haven’t yet pushed any big red buttons. Sillerman has since paid $10 million of his $15 million purchase of preferred stock. All parties are attempting to work things out; SFX is in discussions over its loans, and Sillerman is in talks with SFX over the remaining $5 million of his preferred stock purchase.

SFX’s share price was $0.193 in midday trading Thursday. It has fallen 33.4 percent since December 24 and is 96.3 percent below its 52-week high of $5.25.

Adding to the company’s troubles, SFX has parted ways with the company behind artist management firm TMWRK. SFX purchased TMWRK, home of Diplo and many other EDM artists, in 2014. But TMWRK agreed to pay $3.6 million to leave SFX, which will abandon the business and write down the value of its investment. This settlement could be seen as a cash-starved SFX receiving $3.6 million to part ways with a successful management company.

Regardless, the company’s leadership isn’t going to change just yet. At the annual SFX investors meeting on December 28th, shareholders unanimously approved Sillerman and seven other board nominees.

But a consequential outcome seems inevitable. Sillerman, now without the possibility that Live Nation executive James Barton will reportedly join the company, will have to work with lenders to find a solution. Given Sillerman’s recent track record of making and breaking promises, a default cannot be ruled out.

The music industry hasn’t seen this sort of financial predicament since Citigroup took control of EMI from private equity group Terra Firma in 2011. Citigroup later sold off parts of EMI to Universal Music Group and an investment group led by Sony/ATV Music Publishing. A similar outcome could happen for SFX, which has a number of popular festivals in its portfolio that would interest competing promoters or private equity groups.