One-Hour Analysis of Live Nation

We like to use Value Line as a weekly source of potential ideas. Since we are value investors, some might find it strange that we would use a publication whose ranking system is based mostly on price and earnings momentum as a primary source of idea generation. Perhaps in the future we will take a look at track record of their ranking system and similar ones like Zack’s and review the literature on adding a momentum component to value investing. But back to how we use Value Line as an idea sourcing tool.   Every week Value Line publishes an issue that contains roughly 130 stocks in it grouped by industry. This gives us a chance to quickly review the latest results and financial metrics on 6 or so industries a week. It also puts in front of us hundreds of companies we might never even think about or come across using other methods.

One such company that popped out of a recent Value Line issue we decided to revisit was Live Nation. While at Behind the Numbers we originally wrote up the company as a short. We were concerned with the high leverage, the aggressive rollup strategy, governance issues and long-term growth rate assumptions amongst other things.  Since then, LYV has merged with Ticketmaster, signed a mega deal with Madonna and now have John Malone and Liberty Media as large shareholders.  We decided to take another look at LYV to see if it has any investment merits either long or short. Here is how I started my “One hour analysis” of LYV.

Here are the types of questions I had before I started my analysis:

They are the largest live entertainment copy in the world.

  • 47 million fans attended 22,000 events with 2,300 artists.
  • They only own 25 of the 133 venues they deal with.  75 are leased the rest are booking arrangements or operating agreements

The rationale of the Ticketmaster transaction.

    • Seemed like they were trying to monopolize the concert industry by controlling the artists, the venues, the sponsorships and the ticket sales.
    • The current profitability and lack of growth indicates that hasn’t really happened yet. Why?
  • How Liberty Media became involved since LYV used to be part of Barry Diller’s IAC Corp.
  • How the big music act contracts are accounted for. There is always room for confusion with a company like this. Is it an opportunity or a risk?
    • LYV manages many well-known acts and had a high profile contract with Madonna a few years ago.
    • This is always something that can cause confusion with investors as far as reported earnings and cash flow.
  • Debt structure. Coupons (refi opportunity?) and maturity profile (liquidity risk?)
    • Something I always want to understand with a company like this.
  • Do they own the venues? Is there an asset play angle?
    • REIT conversions are all the rage these days (IRM PENN GET etc.). Is there an asset conversion angle to this story?
    • They were buying up venues when they were part of Clear Channel and always talk about their high profile venues like the House of Blues and the Fillmore.
  • What Liberty Media’s end game may be. There is always an endgame with John Malone.
    • I saw that Liberty continues to increase its stake in LYV. Why?
  • How do they make money and what are the expectations for the company’s future prospects?
    • There is always a “growth story” with every stock. What is their “growth story” and is it all about acquisitions? If so, I will not be that interested.
  • What would a variant view be and what would my confidence level be that it 1) provided sufficient downside if it was wrong or never materialized. 2) Supportable and not just a theoretical discussion 3) different enough to warrant more work as a potential investment.
    • So this is not really an asset play
    • What is interesting is the tout the House of Blues and places like the Fillmore, yet the capacity of those venues relative to their total attendance is miniscule. So that really isn’t part of the investment premise.
    • The venues they own have less than 30,000 seats and most are under 10,000. So it is a nice PR thing, but no real value for the company.
  • They have 4 businesses
    • Concerts (65% of revenue)
      • They are a promoter
        • They get ticket sales (net of payment to artists), parking , food, etc.
      • I don’t think there is much operating leverage here because most of the costs are probably a % of revenue.
    • Ticketing (22% of revenue)
      • This is Ticketmaster. They bought them in 2010. This is where the debt came from. Haven’t looked back on the acquisition yet.
      • Sales are 75% online, 15% outlets, 7% call centers.
      • They sold 141 million tickets direct and 135 million through venues box office.
        • 3-5 year agreements
      • This is the best for growth and profitability, but also has the most competition. More later.
    • Artist Nation (7% of revenue)
      • This is like Mr. Kincaid on the Partridge family.. they are agents that rep 250 clients.
      • This is kind of a double dip on concerts, because they get a part of their touring money, which would seem to be part of the costs in the concert revenue.
    • Ecommerce (3% of revenue)
      • Basically it is a fee they get selling tickets on line.
      • Also seems like a double dip. I think they get a fee on top of the ticket sales in the concerts segment.
    • Sponsorships (3% of revenue).. Venue sponsorships, like the Coca Cola Starplex naming rights.
  • They did 13 small acquisitions for 50-80% of different businesses (artist management, tee-shirt company, promoter).. No real big $$$ spent
  • Main competitors are all private or foreign
    • One competitor is formidable and that is AEG or Anschutz Entertainment.
  • Risk section..
    • In the secondary ticket sales market, we have restrictions on our business that are not faced by our competitors, which restrictions are both self-imposed and imposed as a result of agreements entered into with the FTC and the Attorneys General of several states. Has to do with Ticketmaster acquisition and their Ticket now website.
    • Maybe tax liability from Clear Channel
    • Some third party stuff with Clear Channel
    • Ticker fees lawsuit that I think got settled last year (I am reading 2011 10K)
    • Liquidity
      • $1B in cash
      • But $440 million is customer cash and $219 is concert related. So their free cash is only about $340. (overstates EV a bit)
    • As of December 31, 2012, approximately $62.1 million of our total indebtedness (excluding interest) is due in 2013, $344.0 million is due in the aggregate for 2014 and 2015, $876.7 million is due in the aggregate for 2016 and 2017 and $492.9 million is due thereafter. In addition, as of December 31, 2012, we had approximately $2.0 billion in operating lease agreements, of which approximately $118.9 million is due in 2013 and $114.4 million is due in 2014.
      • $250M 8.125% note due 2018
      • 10.75% note due 2015
      • 2.875% convert due 2027.. put appear to be callable or putable in 2015 or so.
      • $150-$200M in CFO depending on deferred revenue and prepaid expense and account receivables swing
    • Cap ex running $120M a year.. Not a lot of FCF
  • Out of $340M in D&A over $215M is Amort.

Revenue and income

  • They paid $120M in interest with $5.3B in revenue.. Big reason they make no money.
  • They calculate EBITDA at $437M.. Yahoo says they are at 7.5X EV/EBITDA.. But in this case the I is important.
    • Big adjustments are
      • $343M in D&A

$60M in stock based compensation.

Out of the $437M EBITDA the breakdown is

        • Concerts $30M. (they made ($99M in 2009)
        • Ticketing $272M (made $9M in 2009. Reflects Ticketmaster acquisition)
        • Artist Nation $47M
        • Ecommerce $51M
        • Sponsorship $120M (almost 100% profit margins)
  • 2013 seems to show growth, but not much 4.4% YOY revenue growth and 3% EBTIDA growth

Lots of interesting data on concerts and attendance in 10K

  • Attendance is declining (especially in Europe (15.7M in 2011 down from 19.2M in 2009).
  • Kind of like movie biz.. Trying to raise prices or get more per attendee. Up a bit.
  • 50% of the tickets they sell are concert tickets.
  • They had a presentation late last year. Just looked at the slides.
  • Want to growth EBITDA by 30-35% by 2015
    • More concerts
    • Leverage social media
    • Growth in CPM in advertising and sponsorship
    • Getting a $0.35 NA cost per ticket reduction. They point this out a couple of times, so this is important to look at how and why.
    • Triple secondary ticket volume—seems to be the big driver..

Guidance

  • 2012 will see two year revenue growth of 15% and EBITDA growth of 25-30% (acquisition related?)
  • FCF up 70%
  • Over next 3 years believes it can add $150M in EBTIDA by 2015 (up from $430) This is what gets everyone excited.. 8 X $150M = $1.2B increase in Equity assuming no new debt on equity of $2B. What is that 30%_ IRR??

Liberty Media owns 20%.. they always make things complicated, but usually get value out of their stuff.

Weitz is 3% holder, but they own all things Liberty Media.

      • Shapiro capital owns 8%???
      • Harris owns 7%
      • Then mostly indexers..

 

Rationale of merger

Question: Why are you doing this? And why now?

 

The combination establishes the world’s premier live entertainment company by joining Live Nation’s concert promotions expertise with Ticketmaster’s world-class ticketing solutions and artist relationships to improve the live entertainment experience and drive major innovations in ticketing technology, marketing and service.

Live Nation Entertainment will have the tools to expand access, improve transparency and deliver artists and fans more choice – driving greater attendance at live events and bringing more value to all major constituents in the industry.

This combination will drive measurable benefits to consumers and accelerate the execution of Live Nation’s strategy to build a better artist-to-fan direct distribution platform.

Live Nation and Ticketmaster believe that this merger will create a well-diversified company with a strong financial position and is in the best interests of the shareholders of both companies.

Current goals

Maximize ticket sales in the broader ecosystem around a live event. Grow the business by increasing ticketing market share. Two core growth strategies:

Increase the 400 million ticket base.

  • Increase conversion.
    • 30% of public says they would have gone to a show but they didn’t hear about it.
      • Increase sales per show.
      • My question, how % of capacity are they at now?
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About Tim Heitman