Disco Donnie Estopinal, the first promoter to sell his business to Robert F.X. Sillerman’s newly re-formed SFX Entertainment, is an American dance scene folk hero: He almost went to jail fighting for the rave cause in 2000, when the U.S. government attempted to apply the so-called “Crack House Law” to event promoters, deeming them responsible for drug activity at their events. He stood his ground, and the indictment was dropped — clearing the way for promoters to go about their business without concern, and fueling the fire that eventually ignited the U.S. EDM explosion.
So it was significant when Estopinal, one of the most credible guys out there, faced his peers on June 10, 2012, the very day the sale of his Disco Donnie Presents was announced. Sillerman was still a new name, and a new idea, to the burgeoning EDM industry, which was just starting to celebrate its newfound prosperity: Insomniac Events’ Electric Daisy Carnival — which would take place that weekend in Las Vegas — was sold out, surpassing 300,000 attendees during its three days. Skrillex had just won three Grammy Awards. Swedish House Mafia was still alive and kicking, riding high off of selling out New York’s Madison Square Garden in just nine minutes. Things were good, and they were growing.
Estopinal had street cred with the ravers, so he faced criticism for collaborating with a perceived moneyed opportunist like Sillerman, but Estopinal’s esteem with Wall Street is much lower. After all, the first company Sillerman chose to buy was his Donnie Disco Presents, one that ran more than 600 events last year and still lost money.
Now, with Sillerman, 65, just weeks away from taking the EDM incarnation of SFX to the public markets in a $175 million initial public offering, Wall Street is about to provide some tough answers. In a few weeks the industry will know how investors really feel about the burgeoning EDM movement, and more specifically their opinion of Sillerman’s latest roll-up.
Here’s the irony: In the 14 months since Estopinal sold his company, not only have suspicions of Sillerman somewhat dissipated, but the EDM community, by and large, has already changed its tune.
Insomniac’s Pasquale Rotella was once one of the most vociferous opponents of “selling out,” but just a few weeks ago he inked a $50 million deal to sell half of his successful business to the biggest corporation of them all, Live Nation. Now, dance promoters across the land aren’t so much waiting on a call from Sillerman’s people as they are making sure they too can capitalize on what could wind up being just another dance music “bubble.”
At EDMBiz in June, during the “Growth and Investment in EDM” panel, five venture capitalists and one lawyer discussed the potential of the “EDM space” — a phrase used often during the conference’s three days. They generally agreed that they’re looking for “average opportunities” of around $50 million, and threw around phrases like “management roll-up,” “single agency plays” and “curation technology” to describe what they’re looking to buy. Most of EDMBiz’s attendees — many of whom had given Estopinal a hard time last year — were there looking for a deal, after all.
You could call it the “Sillerman Effect”: The quick education of a formerly ramshackle group of entrepreneurs about how big money works, and the even quicker loss of their concerns about it. SFX picked up several additional companies in the intervening year, including significant gets like digital download site Beatport and Dutch event producer ID&T. Ron Burkle’s Yucaipa is backing former Pacha director Danny Whittle’s new Ibiza project, including a nightclub and a collective DJ working facility. Even Patrick Moxey’s proud indie Ultra Music entered into a strategic alliance with Sony Music, making him Sony’s worldwide president of electronic music.
But of all the acquisitions, joint ventures and venture capitals, Sillerman’s gamble and vision are the biggest. He didn’t dip his toe; he stuck in his whole foot. He told Billboard last year he’d invest $1 billion to build his EDM empire, but he hasn’t spent anywhere near that much and he couldn’t even if he tried-the EDM industry just isn’t that big.
For Sillerman the goal isn’t to aggregate profitable businesses — many of his buys are losing money. It’s to make something bigger than the sum of its parts, a network of media opportunities that amount to a global youth marketing platform, framed around EDM — or as SFX calls it, EMC (electronic music culture). The company lost $49 million on revenue of $242 million in 2012. Or, to be more accurate, the companies SFX has wholly or partially acquired had a pro forma loss of $242 million last year.
Fund Raiser
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.”
Battle Lines
The mega-festival battle lines are drawn between ID&T/SFX and Insomniac/Live Nation. The stated goal of Sillerman’s mega roll-up has always been corporate sponsorship, confirmed by the WPP deal. To command an international media buy of that scale, he needs more than just disconnected events, no matter how large. With so many far-flung promoters locked up, Sillerman is now moving on to other entities. Several independent agencies report receiving phone calls from SFX vice chairman Shelly Finkel, who does all of Sillerman’s initial reach-outs and who has become something of an EDM industry icon himself. The 69-year-old former boxing promoter, who wears his signature “cool grandpa” sneakers, has independent record labels, websites, booking agencies and nightclubs all on speed-dial.
“If you ever owned an entity that might have anything to do with electronic dance music, you will get the Finkel call,” says a former magazine publisher who has received such a call.
Despite the chaos of Sillerman, there’s a method to his madness, says another person who has dealt with him: “He’s going to be good at raising money and selling sponsorships globally against all these assets.”
With such a diversified platform — even if it just amounts to a laundry list — a single large sponsor, like, say, Pepsi or Samsung, could drop one big check to reach its youth target internationally. An end-to-end program encompassing on-site presence at SFX-owned events; endorsement from SFX-managed artists within paid, owned and earned media channels; editorial support from SFX-owned entities; and newly developed mobile or other technologies to tie it all together does sound appealing and turnkey.
“When we look to [music] partners, it tends to be one of the problems that it’s so disaggregated. It’s very localized, very artist-specific,” says Emma Montgomery, global product director of Starcom MediaVest Group’s Human Experience Center, which specializes in studying millennials and has researched EDM specifically. “The fact that SFX has tried to pull everything together in one place, to bring the entire experience under one roof, is very compelling.”
To understand Sillerman’s strategy better, it would be wise to look at the books of Live Nation, the core of which was built by Sillerman before its sale to Clear Channel. Live Nation’s sponsorship and advertising revenue grew from $164 million in 2007 to $248 million in 2012. More importantly, sponsorships and advertising have good margins. Roughly $176 million, or 38%, of Live Nation’s $459 million of adjusted operating income (AOI) in 2012 came from sponsorships and advertising. The concerts division generated nearly $3.9 billion of revenue — two-thirds of the company’s total revenue — but contributed just $30 million of AOI.
The opportunity for SFX to build a major media platform that multibillion-dollar brands could use to get in front of hard-to-reach millennials is one that many are taking seriously. WPP CEO Martin Sorrell made this clear in a joint press release explaining why his company has taken a stake in SFX, saying, “We can help bring this valuable audience to our agencies’ global clients.” Even though the amount committed was relatively small for the world’s largest agency group, it was important validation.
In other words, SFX will be selling a media/sponsorship play first and a music/live event business second. The idea is to use music to create a platform much larger than just selling tickets.
“What’s interesting with what SFX is doing is that it’s enabling brands to really be a part of the culture, be a part of the music, the events, the videos,” Montgomery says. “Brands can find a natural and authentic way to be invited into the culture through community, which is better than slapping their sponsorship logo on it. I think it’s really smart.”
For sure, while the vision looks great on paper there’s no guarantee that Sillerman is the right person to pull it off or if he has done the right calculations to make the financials work.
For now, SFX is counting on the cash flow of its acquisitions, many of which, according to the IPO filing, are operating at a loss. Also of concern: TomorrowWorld, ID&T’s first attempt at a U.S. festival, and the first traveling edition of its Belgium festival TomorrowLand. The event, set for late September on a farm just outside Atlanta, is reportedly having a hard time moving tickets. At a price tag of up to $16 million, according to ID&T CEO Duncan Stutterheim, the event could incur significant losses if it doesn’t sell out as expected, or at least come close.
While the timing couldn’t seem worse given the pending IPO, ID&T is more than just TomorrowWorld.
At a recent press event in New York, the company presented its vision for the coming year, including the eye-popping Sensation arena tour that will hit four cities this fall (last year’s two-nighter at Brooklyn’s Barclays Center grossed $3.6 million, according to Billboard Boxscore). CEO Ritty Van Straalen and chief creative officer Jeroen Jansen spoke of ID&T’s intention to broaden its focus from EDM to more generalized immersive experiences, a la Cirque du Soleil. ID&T could flip the script entirely and give SFX its biggest win, outside of the EDM bubble. And that might just surprise everyone.
