Robert F.X. Sillerman wants to throw Wall Street’s biggest dance party. The entrepreneur who rolled up the rock concert business is trying to do the same for electronic dance music with a planned $175 million public offering of SFX Entertainment. Though Mr. Sillerman’s track record is good and he is focusing on a hot slice of the music industry, this bash promises to be more fun for partygoers than investors.
Electronic dance music used to be confined to discos like Studio 54 or abandoned warehouses in European cities. It has taken off recently through the expansion of large outdoor festivals, like SFX’s Tomorrowland this coming weekend in appropriately named Boom, Belgium. Ticket, merchandise and other sales should reach $4.5 billion this year, according to the International Music Summit Business Report.
But it is still a fragmented corner of the market, with many players - including Live Nation, AEG and Massive Enterprises - jostling for dominance. For Mr. Sillerman, that’s a familiar opportunity. In 2000, he sold another company that had snapped up concert promoters for $3.3 billion. SFX has already committed about $140 million of the cash it hopes to raise for a series of acquisitions.
The company’s filing with the Securities and Exchange Commission calculates a pro forma (accounting lingo for “make believeâ€) financial picture of what this would look like. Had all of these deals been previously consummated, SFX would have lost about $50 million on $242 million of revenue in 2012. Even under SFX’s permissive accounting - allowed under the Jumpstart Our Business Startups Act - that’s not terribly attractive.
Yet it may not be the best reason to steer clear of SFX. New shareholders will be diluted from the start as the company’s net tangible book value, which was negative $10.4 million in March, will be recalculated to reflect the new share price. This offers a boost to Mr. Sillerman and other current stockholders, including the promoters SFX has promised to buy. But it means I.P.O. investors may effectively hand over dollar bills that are immediately turned into something worth less.
At 65, Sillerman may not be able to keep up with his new venture’s customers on the dance floor. But he’s employing novel financial gymnastics in bringing them all under one big disco ball.
Rob Cox is editor of Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
