Rob Cox: Wall Street’s rave party feels the drop

By Rob Cox
September 3, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street’s party is feeling the drop, but not in the ecstatic way ravers typically do when the bass kicks in. Entrepreneur Robert Sillerman’s attempt to roll up the electronic dance music business looks to be near collapse, not long after UBS, Deutsche Bank, Barclays, Jefferies and others helped him take the company public.

The short, doleful life of SFX Entertainment is a classic example of the sort of legalized racket that has long been the provenance of high finance. From the get-go, the company looked a shambles, and its founder’s ambitions too grandiose. The prospectus for its initial public offering, which raised $260 million less than two years ago, makes for a prime Harvard Business School case study in red flags.

Though SFX is still a going concern, it is only fitting that investors overdosed on speculative excess in an industry entirely predicated on foregoing moderation. For those yet uninitiated in a Skrillex brostep or Bassnectar’s glitch hop, SFX’s mission was to enable club music culture “with the best possible live experiences, music discovery and digital content.”

More to the point, Sillerman’s basic plan was to raise a bunch of money from outside investors, acquire every independent promoter he could and then sell the whole caboodle for a bundle. That’s what he did in 2000, having consolidated rock music promoters into a company that Clear Channel Communications bought for $4.4 billion. It was then spun off a few years later to form Live Nation, the world’s largest marketer of live music.

The plan started decently enough. Sillerman’s phalanx of blue-chip investment banks sold shares to the public at $13 apiece. They trade today around 60 cents, a negative return of 95 percent. SFX followed the IPO by selling $295 million in second-lien senior secured notes last year. By the looks of the company’s finances, these investors will be lucky to see their money returned.

That’s not to say the EDM craze is going the way of Jazzercise. The millennial generation, or at least a large segment of its more tattooed demographic, still queues up for weekend dance marathons, often fueled by molly and Red Bull vodkas.

New York City’s Randall’s Island will host the sixth Electric Zoo festival starting on Friday. The three-day gala put on by Made Event, which SFX acquired shortly after going public, is expected to host more than 100,000 merrymakers. Two years ago, the Electric Zoo was shut down prematurely after two youngsters died at the festival after overdosing on the drug MDMA.

There are signs of saturation, however. Just this week, SFX was forced to cancel the One Tribe event planned for later this month outside Los Angeles, citing poor ticket sales, Billboard reported. The festival was supposed to extend beyond dance music to include yoga, wellness and other spirituality-related activities.

That the EDM boom would eventually slow is no secret to its most adamant practitioners. As the promoter Gary Richards, whose stage name is Destructo, told Michaelangelo Matos in his 2015 book “The Underground is Massive: How Electronic Dance Music Conquered America,” the industry is “getting out of hand. Every time I turn around, someone’s got an EDM-flavored gum and an EDM-flavored Popsicle they want to sell me on. I’m always wondering how far it can go.”

Sillerman’s investors are wondering the same. In a recent public filing, the company reported a 50 percent increase in revenue for the six months ended in June, to $173 million. That’s impressive for a niche industry, but expenses also totted up to $213 million, leaving SFX with a net loss of $90 million.

For a while, SFX has been able to borrow to plug losses. Those days may be done. The company’s credit ratings have been slashed by Moody’s Investors Service and Standard & Poor’s. Vendors, according to the Wall Street Journal, are demanding cash upfront for services, a development SFX called a “short-term disruption to its business operations.”

With more than $300 million of outstanding debt, and only about $52 million in available cash before its latest woes, SFX looks like a candidate for Chapter 11 protection. Even Sillerman himself recently failed to raise the funds needed to buy the 63 percent of the company he doesn’t already own, a deal launched earlier this year and abandoned a few weeks ago.

The show may yet go on for Sillerman. He could surprise by arranging a rescue of some kind. And he has succeeded in at least one respect: he rolled up the cottage rave industry. SFX now comprises 14 companies, including 11 festival promoters producing more than 30 events globally. It also owns nightclubs and an online electronic music store.

That makes SFX a convenient, one-stop shop for anyone looking to dominate the EDM scene, something Live Nation has made no secret of wanting. This time around, however, Sillerman won’t make anything like the sums he did 15 years ago. Nor will the public investors he brought along to the party.

– Research by Benjamin Kellerman

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