Back in March 2015, I wrote a blog post on Live Nation Entertainment (LYV). This is my most popular post to-date.
I recently received an email from a reader who challenged LYV’s return on acquisitions. This is a big issue as LYV has spent $565 million on acquisitions and related expenses over the past five years. If they are engaging in value-destroying acquisitions, investors should be aware.
LYV discloses very little information on their acquisitions. The most detail I could pull together is on the 2013 acquisition of 51% of Insomniac Events. Insomniac puts on Electronic Dance Music (EDM) festivals and concerts, the largest of which is the Electric Daisy Carnival in Las Vegas.
But even here, the details are quite sketchy. Even the acquisition price is difficult to pin down. Media reports cited the acquisition price as anywhere form $40 million to $50 million. At a March 10, 2015 investor conference, Michael Rapino, the CEO, said the purchase price was $40 million so I will go with that.
Further, although Insomniac put on multiple events in 2013, I can only find details on the concert they promoted in Las Vegas.
So, with that grain of salt, here is my model:
We can quibble about my assumptions and the numbers forever, but let’s say this is directionally correct (If you don’t think it is directionally correct, please let me know). LYV’s strategy therefore is to take a poorly monetized festival and immediately increase attendance by 20%, increase sponsorship by 300%, and move ticket sales to Ticketmaster. This turns a money losing festival into something like $20 million of EBITDA by Year 2. In isolation, this is nice but nothing special. Absent any other moves, they would earn about 10% on this asset just by bringing scale and business acumen to bear.
But, the real juice comes in how LYV exploits the intellectual property it has acquired. That is, the value of this acquisition goes beyond the cash flow generated by this single festival. The acquisition included brands, goodwill, human capital, knowhow, customer list and other intangible assets. LYV is uniquely positioned to fully exploit this IP globally. LYV has the capital and the means to immediately expand the Electric Daisy Carnival brand name all over the world.
Accordingly, in 2016 Electric Daisy Carnival festivals will take place in Mexico City, New York City, Milton Keynes, United Kingdom and Tokyo in addition to Las Vegas.
This full model makes intuitive sense to me:
- Acquire 51% interest in a company with track record of drawing fans but not monetizing them properly.
- The founders of the acquired company retain a 49% share and continue to have a vested interest in its success.
- LYV immediately increases EBITDA at double digit rates by reducing expense through scale advantages, bringing in professional management and advertising and moving ticket sales to Ticketmaster.
- LYV then plugs the festival concept and brand into its distribution network and replicates the festival all over the world.
In a sense, this is similar to a multinational like IBM buying a high-tech company that sells its products in, say, 3 countries. IBM can immediately deploy the products throughout its distribution system, giving the company a presence in 130 countries. This gives an immediate boost to sales and income with little incremental expense.
Of course, this assumes that there are synergies at work when LYV makes an acquisition – a concept that comes perilously close to the Platform Value idea I poked fun at here. However, I think there are a couple of differences. First, LYV is doing acquisitions at a much slower rate than these platform companies. Second, LYV’s acquired companies often maintain a great deal of autonomy so there is no pressure around integrating the company into LYV. This avoids the cultural conflicts that arise around acquisitions.
Beyond these considerations, I do think that there is far less risk of poor capital allocation in a company in the John Malone Empire. Malone deserves deference as a capital allocator. Perhaps you see this blind faith as naive, and maybe it is. But he certainly has an impressive and long track record.