Robert Sillerman’s SFX
The recent and sudden collapse of SFX is a sobering lesson for the live music market. The business has many intermediaries and is perforce regional in nature. Money can go so far in building the market, for it is largely decentralized and depends on the whims and the attentions of the local concert promoter. Even a successful genre like EDM (Electronic Dance Music) is no guarantee that success will be within reach quickly if the holder of the purse strings is not familiar with the culture and ways of the market operators.
SFX sought a shocking bankruptcy protection on Feb. 1, effectively ceding management to its creditors, who are now left holding arrears of nearly $500 million. Shareholder value has plummeted from an IPO price of $12 a few years ago to just ¢5. Creditors own the firm and owners of stock have no leverage at all. Bondholders will likely seek liquidation by looking for a buyer in the private equity markets, for a proper restructuring of the company is not a probable outcome. Three subsidiaries are already up for sale. They are FameHouse, a marketing company; Flavorous, a ticketing agency; and Beatport, a store for DJ tracks. Before going press, SFX had started laid off fifty employees in New York.
The story of SFX Entertainment is inextricably linked to the idiosyncrasy of its owner, Robert F.X. Sillerman. The business’s name was a play on Sillerman’s, and his ambition to champion EDM in his mid sixties was all encompassing. In the last four years Sillerman acquired (i) concert promoters ID&T, with its Tomorrowland, TomorrowWorld, and Mysteryland Festivals; (ii) Made Event, another EDM concert promoter and producer of New York’s Electronic Zoo; (iii) Disco Donnie Presents, a concert and festival producer in the U.S., Canada, Mexico, and South America; (iv) dance music download/streaming service Beatport; and (v) artist management firm TMWRK (Teamwork Management).
Sillerman had built a reputation of buying single companies, repackaging them, and selling them at a profit. He found buyers like Capstar Broadcasting in the 1990s, to which he sold 71 radio stations for $2.1 billion. He then entered the concert business, acquiring top regional concert promoters. In 2000 he turned his purchases to Clear Channel for $4.4 billion, which bought his holdings as SFX Entertainment (Editor’s note: we covered this transaction in earlier editions of the MBJ).
With his new SFX, Sillerman went into a $1 billion EDM spending spree. Ready cash was his tool, above all. In Sept. 2012, he could tell Billboard: “I know nothing about EDM, I [only] meet the people whose places we’re buying; and I [haven’t a clue about] what they do or what they are talking about–not a clue.” When SFX was going down he added that the reason for failure was “mistakes in management and a misunderstanding of the complexity and time of marketing partnerships”. Indeed, it seems that early on the market’s functionality and its operators were of little consequence and an attitude, even if it was presumptuous, was good enough for success (Sillerman has since lost favor with Wall St.).
That SFX failure was its own making relies on further testimony from its main protagonist. For example, Sillerman tells Forbes that “the last thing [we were] thinking about [was] margins; [when you make] cars or washing machines or something like that, I guess you have to focus on margins, but that’s not the way I [viewed] the entertainment business: [it is] an art, not a science.” The lack of a proper cost-benefit standards in SFX’s trajectory surely contributed to its downfall. Moreover, the lesson is that an M&A entrepreneur like Sillerman, or a detached investment banker, may not do well in the arena of live music, especially if they intend to emulate the way they have run their many businesses in the past. Clearly this was on Sillerman’s mind, for he was often quoted for trying to replicate on a grander scale the first SFX.
Sillerman’s sui generis management in short, is the reason why it is easy to reconcile the failure of SFX with a thriving EDM market today (see the EDM related piece in this issue of the MBJ). Still, Atlanta-based EDM festival TomorrowWorld, one of SFX’s largest festivals, will now not take place in 2016. The festival first hit hard times last year as a massive rainfall led all non-camping fans to be turned away. The news of SFX’s financial troubles did not help either. But TomorrowWorld seems to be the exception. The bankruptcy protection clauses have earmarked $23 million in operating expenses to continue normal operations of any festival owned by SFX.
Creditors have been generous with their allocation of festival money because, as Richard Tullo, a Bloomberg analyst, says, “SFX is likely well-managed on the festivals and business unit level and the company’s shortcomings, in our view, appear to be with the holding company management and its board of directors, which have arguable destroyed shareholder value.” In effect, Sillerman spent badly needed receipts attempting to take SFX private before the bankruptcy. Shares were liquidated for cash while joint financing was being pursued, creating a perception of weakness and adding substantial operational costs –which is what Tullo appears to be referring to. In fact, after SFX initially went public 2013, and attracted equity worth $260 million, it was making profits of $146 million from a revenue of $239 million; profit turned to a loss of about $15 millions in its latest statement.
As an investor, Sillerman would be in error if he did not take the opportunity to invest when profits could be made. But he could also be in error by taking risks that did not return the value that was expected. Clearly, business moguls win some and lose some. What is puzzling, though, is the lack of due diligence that Sillerman and SFX brought to the table.
By Brooke Adams
