Roughly a year ago, SFX Entertainment chief Robert F.X. Sillerman dropped an F-bomb during a testy earnings conference call that rattled the electronic dance music (EDM) company’s stock. Now, after Sillerman unveiled a deal to buy SFX Entertainment, which operates popular EDM festivals such as Electric Zoo, TomorrowLand, Mysteryland and Ruhr-In-Love and controls a streaming service called Beatport, it is hedge funds and analysts that are crying foul.
Maglan Capital, an owner of roughly 1.5% of SFX Entertainment’s outstanding stock, called Sillerman’s $4.75 a share go private offer “a way low-ball bid” and told Forbes by telephone it believes the company is worth over $10 a share, given the global expansion of SFX’s EDM festivals, the strength of its partnerships with marketers such as T-Mobile and Anheuser Busch Inbev, and the prospects of its burgeoning streaming platform.
Albert Fried analyst Richard Tullo further characterized the deal as “an insult to investors” in Wednesday morning client note. He recommended SFX’s board of directors hire an investment bank such as Evercore, Greenhill or Allen & Co. to shop the company.
While investors may fight for a higher price, Sillerman’s antics and SFX’s near 70% share price tumble since an Oct. 2013 initial public offering where the company raised $260 million at a valuation north of $1 billion, indicate that EDM didn’t play well with stock investors. For Sillerman, who built up an about 40% stake in SFX through stock purchases as shares limped along in the low single digits, a successful buyout would also reflect his use of yield-and-growth starved capital markets to build an EDM empire and then take it private at far lower prices.
In late 2013, SFX used most of the over quarter billion dollars it raised from public stock markets to buy up EDM festivals. The Nasdaq-listed IPO allowed SFX to take controlling stakes in EDM promoters ID&T, i-Motion GmbH Events, Totem Onelove Group, Made Event and EZ Festivals, expanding the company’s presence in North America and internationally. At the time, Sillerman, a media mogul after building Live Nation and selling it to Clear Channel for $4.4 billion and creating other successful ventures in radio and television, had to personally stand behind the company’s $75 million term loan facility.
However, in Jan. 2014, SFX was able to go to raise $200 million in deeply speculative grade debt to refinance that term loan, which was coming due in September, allowing Sillerman to remove his debt guarantee.
Then came some puzzling behavior. At an EDM conference in Miami last March, Sillerman was photographed flipping ‘the bird’ to the media as he descended a private jet wearing a large gold chain with a dollar sign hanging from it. Days later, Sillerman hosted a somewhat bizarre earnings call from Miami, in which he introduced CFO Richard Rosenstein as Las Vegas comic “Shecky Greene,” and fielded questions from an anonymous short seller into into alleged sh*ty deal-making.
“We just want to make sure you are still sane,” one stock analyst asked, referring to the photos circling on social media.
Sillerman said the photos were “the combination of an internal conversation and joke within the company and while I certainly wasn’t crazy about the fact that it was tweeted out, it’s had a very interesting reaction from the music community down here as fundamentally [they] said, f**k yeah, we get it.”
“But, no, I was not trying to imitate Michael Jackson or Steven Colbert talking to somebody about how much better the hot dogs were in New York… It is fairly indicative, I think, of the way internally that we enjoy ourselves and we’re willing to push the envelope, I guess is the best way to say it,” he added.
Since the March earnings call, which caused SFX’s shares to tumble 20% intraday before recovering, the company’s stock has continually drifted lower until Wednesday’s take private offer.
Maglan Capital says SFX is successfully growing its presence in EDM, and they remain bullish on the electronic dance music craze. Yesterday, the company announced a marketing partnership between T-Mobile and its digital music service Beatport, and in the third quarter, SFX’s revenue rose 194.5% to $143 million, while pro-forma EBITDA rose 69% as the company put on 267 festivals in the all-important summertime quarter.
“It is only getting bigger and bigger. It is only going more global. This is not disco,” Maglan said by telephone. “If [Sillerman] wants to buy our shares, he will have to pay a higher price,” the fund added.
Added, Albert Fried’s Richard Tullo, ”we think investors should lobby SFXE for a 50% to 100% premium over the current offering and if investors are unwilling to publically acknowledge this situation we are more than ready, willing and able to play activist in this situation. If SFXE is upset at our public criticism well that is ok because we are advocating for the investors here and not for the C Suite.”
Sillerman’s $4.75 a share take private offer is non-binding and it stipulates that stockholders can remain investors in SFX alongside him. “I have put forward a proposal that offers substantial value and flexibility to all shareholders,” Sillerman said in a statement.
“Given the inherent risks in our business, my offer guarantees a substantial premium to current price. Those shareholders who are interested in remaining as investors in the company alongside me will have the ability to elect to keep all or part of their shares,” he added.
SFX’s board of directors has formed a special committee of independent directors to consider Sillerman’s proposal and has hired legal advisors. The take-private deal is will require approval by holders of a majority of the SFX shares not owned by Mr. Sillerman or his affiliates.
Sillerman further indicated that if the board or the special committee decides to explore alternative transactions, he would assist those efforts and even is prepared to support an alternative sale that “provides compelling value to the Company’s stockholders.”
SFX shares were trading higher by roughly 25% on Wednesday afternoon. Nonetheless, shares have fallen over 40% in the past year.