music industry spring market updatecdn.hl.com/pdf/2020/tmt-music-industry-spring-market... ·...
TRANSCRIPT
Josh Rothstein Andy Shu
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Houlihan Lokey Music Industry Update
In recent weeks, COVID-19 (better known as coronavirus) has globally sent shock waves throughmarkets and captured the attention of the world. Since mid-February, the outbreak has acceleratedand infections have become widespread, resulting in significant market volatility that is expected tocontinue for the foreseeable future. Substantial disruption to business operations has occurred, andall sectors of the economy have been impacted, including the music industry.
At this point, it is impossible to know how long the outbreak and shutdown will last or the lingeringeffects on businesses, the economy, and the credit and M&A markets, but despite temporarydisruption of live events, we believe that once business resumes, the music industry will continue tosee high levels of activity as companies respond the impacts of COVID-19. We have includedindustry insights to help you stay ahead in this dynamic and constantly evolving sector. Driven bygrowth of streaming music, the sector has seen continued consolidation (such as Tencent’sacquisition of a stake in UMG and Pandora’s investment in SoundCloud) and evolving dialoguearound artist remuneration. Despite the current disruption, we expect activity to remain high for theforeseeable future as the sector continues its evolution, the key players refine their strategic goals,and artists continue to fight for their share.
We understand the anxiety created by these uncertain times, and we are here to share ourperspective based on our real-time conversations with industry executives and our comprehensiveviews on the markets—M&A, public equities, and credit. We will continue to monitor this rapidlyevolving situation and look forward to staying in touch.
Regards,
Roy Kabla Daniel Gossels Brian MarlerManaging DirectorGlobal Co-Head of the Technology, Media & Telecom [email protected]
Managing [email protected]
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Select Recent Music Transactions
Houlihan Lokey’s professionals have unparalleled experience in advising music companies.
*Selected transactions were executed by Houlihan Lokey professionals while at other firms acquired by Houlihan Lokey or by professionals from a Houlihan Lokey joint venture company. Tombstones included herein represent transactions closed from 2011 forward.
has acquired
Financial Advisor*
has been acquired by
Financial Advisor*
has been acquired by
Financial Advisor*
has been acquired by
Sellside Advisor
has been acquired by
Sellside Advisor
has exchanged stations with
Financial Opinion
has been acquired by
Financial Advisor*
has completed a financing consisting of
$24,000,000Series D Convertible Preferred Stock
Placement Agent
has completed a financing transaction in connection with its acquisition of
Fairness Opinion
$50,000,000 Financing
Financial Advisor*
investment from
Financial Advisor*
has been acquired by
Sellside Advisor
has completed a financing consisting of
$24,000,000Series D Convertible Preferred Stock
Placement Agent
has confirmed a Chapter 11 Plan of Reorganization, restructuring approximately $450 million of debt
Second Lien Noteholder Advisor
has been acquired by
Financial Advisor*
has been acquired by
Financial Advisor*
has been acquired by
A portfolio company of
Sellside Advisor
has been acquired by
Sellside Advisor
has been acquired by
Sellside Advisor
has raised equity from Wood Creek Capital to acquire
Financial Advisor*
a portfolio investment of
Valuation Opinion
has divested its equity stake in
to
Financial Advisor*
Projected
6.0 5.8 5.6 5.2 4.7 4.7 4.1 3.8 3.6
1.9 2.0 2.3 2.4 2.7 2.3 3.1 3.3 3.6
4.0 3.8 3.2 2.6 2.3 2.0 1.4 0.9 0.5
1.9 2.9 4.7 6.7 8.9 11.9 13.1 15.517.9
0.30.4
0.40.4
0.4
0.50.3
0.30.3
$14.3 $14.7 $16.2
$17.4 $19.1
$21.5 $22.0 $23.9
$26.0
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E
Physical Performance Rights Digital (excluding streaming) Streaming Synchronisation Revenues
Projected
$4.9
$5.2 $5.3 $5.3 $5.4 $5.5 $5.6
$5.7 $5.8
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E
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Streaming Driving Growth Across Music Ecosystem
Sources: IFPI, Global Music Reports, UBS Research, April 2018. Wall Street estimates, IBISWorld Industry Report dated August 2017.Note: Figures represent revenue received by labels and artists, net of intermediary distribution costs.
Global Recorded Music Revenue (2014A–2022E)
($ in billions)
Continued boom in streaming, now more than 50% of recorded music revenue, causing growing complexity and increased diversification of business models and artist/label relationships; likely driving continued disruption and business model innovation.
U.S Music Publishing Revenue (2014A–2022E)($ in billions)
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Situation Update: Impact of COVID-19 Not Yet Clear
Source: Music Business Worldwide.
Audio music streams were down the week of March 13 while video music streams showed an increase, consistent with overall increases in video consumption during this period.
13.214.5 14.2 14.6 14.6 15.0 15.2 15.1 15.3
15.515.2
13.9
3.5 3.43.6 3.7 3.6 3.7 3.7
3.32.7 2.8 2.7
2.7
16.717.8 17.9
18.218.2 18.7 18.9
18.5 18.0 18.3
17.916.6
Dec 27 Jan 03 Jan 10 Jan 17 Jan 24 Jan 31 Feb 07 Feb 14 Feb 21 Feb 28 Mar 06 Mar 13
Audio Video Total On-demand
Less “On-the-Go” Behavior May Impact Music Streaming Habits (weekly streams in billions)
1
1
1
3
6
7
20
35
40
55
60
124
14
21
64
100
104
152
175
271
400
644
2000
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YouTube Dominates D2C Music Streaming…
Sources: IFPI Music Consumer Insight Report 2018, Forbes, Company filings, Music Ally, Variety, SNL Kagan.(1) Includes Google Play Music paid subscribers.
Music accounts for 5% of YouTube’s videos, but represents 20% of its views.
Total Users Paid Subscribers(in millions)
47%
(in millions)
(1)
5% Non-YouTube Video streaming
(% Time Spent Streaming Music by Platform Type)
28% Paid Audio Streaming
20% Free Audio Streaming
$3.0$3.5
$1.50
$18.23
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…But Is a Less Valuable Platform for Artists Than Peers
Sources: Digital Music News, The Trichordist, Soundcharts, YouTube announcement, Company filings, Music Ally.(1) Per-user payout is calculated by diving total revenue paid out to music rightsholders by the
monthly active users.(2) YouTube annual payout includes subscription and advertising revenue for both publishing and
royalties. (3) Per-stream rate represents how much an independent artist is paid per play.
YouTube’s ad-supported model (and lower payout rates on video streaming) leads to lower payments despite more users.
Illustrative Per-User Payout to Rightsholders(1) Total Payout to Rightsholders (2019)(2)
($ in actuals) ($ in billions)
Spotify vs. YouTube: Not All Users Are Created Equal
Illustrative Average Per-Stream Payout Rate(3)
$0.0120
$0.0106
$0.0099
$0.0080
$0.0056
$0.0055
$0.0044
$0.0032
$0.0016
$0.0015
$0.0013
$0.0009
$0.0004($ in actuals)
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Labels and Platforms Currently Keep Approximately 70% of Every Dollar in the Music Ecosystem
Sources: Citi: Putting the Band Back Together (2018), PWC, Global Entertainment and Media Outlook, Statista, Wall Street Research, MiDia Research.(1) Others include concert cost, manager, concert agent, retail margin, collection fee, concert
promoter, and record producer.(2) Platforms represent EBITDA of music platforms and cost of running music platforms (FM,
Sirius XM, Spotify, YouTube).
While incumbents are focused on “protecting their turf,” there will be significant opportunity for next-generation business models focused on the long tail of the ecosystem and putting artists first.
$256.7$375.4
$477.9
$643.1
$873.0
1.7% 2.4% 2.8% 3.3% 4.1%
2015 2016 2017 2018 2019
Artist Direct Revenue Share of Recorded Music Revenues
Independent Creator Revenue Significantly Outpacing Industry Overall
“Article 13 plans to address the so-called ‘value gap’ between the revenues that online content-sharing platforms generate from enabling users to upload and consume copyright-protected works and the value returned to rightsholders”
April 2019
“We do not find it justifiable in a world in which record companies no longer have the costs of pressing, handling and delivering physical product for them to try to hold on to the lion’s share of streaming revenues.”
Jan 202023% Labels
12%Others(1)
17%Artists
48%Platforms(2)
($ in millions)
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Growth of Streaming Globally Leading to Consolidation and Expected to Be Key Driver of M&A
Source: Akazoo Investor Presentation.
Due to increasing smartphone penetration in emerging markets growing at 5% CAGR, emerging markets will overtake developed markets in number of users by 2025.
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104
194
302
429
510
84
159
230
285
303
320
111
263
424
587
732
830
2016A 2019E 2022E 2025E 2028E 2030E
Emerging Markets Developed Markets
Paid Music Streaming Subscribers by Geography (2016A–2030E)
(in millions)
1.4x 2.5x 2.1x
17.1x
3.3x 2.3x 2.4xMedian 2.4x
11.8x
20.6x
13.0x 13.0x
28.8x
Median 13.0x
Date Closed Mar 15 Jan 17 May 17 May 18 Jan 19 Mar 19 Apr 19 Jul 19 Apr 20
Target TEV $392 $1,200 $700 $5,140 $280 $200 $232 $370 $3,360
Date Closed May 14 Jul 14 Jan 15 Nov 15 Jul 16 Sep 17 Mar 18 Jul 18 Aug 18 Sep 18 Jan 19 Feb 20
Target TEV $500 $100 $56 $75 $2,700 $50 $197 $600 $975 $3,500 $469 NA(1)
Buyer
Target
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Sector M&A Activity
Demand for IP and further consolidation in D2C likely to drive value as strategic players plot their course post COVID-19.
D2C Music Streaming($ in millions)
TEV/LTM Revenue
Record Labels/Music IP
Buyer
Target
($ in millions)
TEV/LTM EBITDA
MBO
Sources: S&P Capital IQ, public filings, other publicly available information.(1) Represents minority investment.
NANA NANA
NANA NANA NA
Median 13.9x
14.8x
10.8x
5.0x
14.5x13.9x
7.2x
Median 10.8x
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Public Market Music Sector Performance
Sources: S&P Capital IQ, public filings, other publicly available information.
Some companies have seen multiple compression, but not to the degree of overall market.
Pre-COVID-19 Market Disruption (as of 1/6/2020)
Post-COVID-19 Market Disruption (as of 4/1/2020)
Implied TEV/2021E EBITDA Multiples
Implied TEV/2021E EBITDA Multiples
NM
NM
How have the syndicated loan markets been affected by COVID-19?
Syndicated loan markets sold off to 90% of par, and new issuances have slowed to a trickle. Private market issuances are open, but on a case-by-case basis. Lenders are willing to provide financing, but are starting to seek higher yields and more structure on terms (i.e., covenants and definitions).
Can/should I refinance my existing capital structure? What about other options, such as a dividend recapitalization?
Due to current market volatility, opportunistic refinancing transactions have been shelved as issuers and underwriters opt to wait to understand how the financial performance will be impacted and for stable markets. Despite recent outflows, market liquidity remains stable and opportunities to refinance will be available once volatility cools down.
What should I do if my covenants are tightening or my lenders are being difficult?
There are a number of alternative capital providers willing to engage in refinancing discussions. Please reach out to us directly to discuss your particular situation.
What should I do if I’m considering an acquisition?
As companies analyze inorganic growth opportunities, it’s important to understand risks to target businesses posed by COVID-19, in addition to understanding the ideal structure for a potential acquisition. Now is a great opportunity to accelerate M&A dialogue. Our substantial buyside expertise and leading Capital Markets Group position us to provide guidance and capital in the current environment.
What should I do if I’m considering a sale?
Our relationships in the music industry, along with Wall Street’s best private equity coverage group, give us unmatched, real-time insights into current buyer sentiment and potential diligence and other concerns related to COVID-19 that directly inform our ability to construct a sale process roadmap to maximize value.
Do I need to discuss COVID-19 as it relates to due diligence in a sale or financing process?
Yes. COVID-19 is part of the world we now live in. It is crucial to have a clear description of COVID-19 protocols in place, a plan of attack to ensure employees are safe, and an understanding of potential business impacts from COVID-19 moving forward.
COVID-19 Considerations
Volatile market conditions have created many questions for businesses. Houlihan Lokey’s significant product and end-market expertise positions us to help review a variety of strategic alternatives.
Sources: S&P LCD, LFI Weekly.11
How Houlihan Lokey Can Help
Our firm is extremely well equipped to help our clients navigate uncertain times. We respond quickly to challenging situations and are constantly helping clients analyze, structure, negotiate, and execute the best possible solutions from both strategic and a financial perspectives.
Sources: S&P LCD, LFI Weekly.
What We Offer
Superior Work Product/Technical Abilities
Creativity, Imagination, Tenacity, and Positivity
Deep, Industry-Specific Expertise
Senior-Level Commitment and Dedication
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Financial RestructuringWe have the largest restructuring practice of any global investment bank. Since 1988, we have advised on more than 1,000 restructuring transactions (with aggregate debt claims in excess of $2.5 trillion). We served as an advisor in 12 of the largest 15 bankruptcies from 2000 to 2019.
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Financial and Valuation AdvisoryFor nearly four decades, we have established ourselves as one of the largest financial and valuation advisory firms. Our transaction expertise and leadership in the field of valuation helps inspire confidence in financial executives, boards of directors, special committees, investors, and business owners we serve.
Why We’re Different
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✓
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2014-2019 M&A Advisory Rankings U.S. Technology, Media, Entertainment & Telecom Transactions Under $1 Billion
Adv isor Deals
1 Houlihan Lokey 198
2 Goldman Sachs & Co 162
3 Raymond James Financial Inc 155
4 Morgan Stanley 154
5 Evercore Partners 144Source: Refinitiv (formerly known as Thomson Reuters)
2019 M&A Advisory Rankings All U.S. Transactions
Adv isor Deals
1 Houlihan Lokey 184
2 Goldman Sachs & Co 167
3 JP Morgan 141
4 Morgan Stanley 122
5 Evercore Partners 112Source: Refinitiv (formerly known as Thomson Reuters)
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Houlihan Lokey is the trusted advisor to more top decision-makers than any other independent global investment bank.
1,300+ Employees 23 Offices Globally
~$1 Billion of Revenue ~$3 Billion Market Cap
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Leading Capital Markets Advisor
No. 1 Global M&A Fairness Opinion Advisor Over the Past 20 Years
1,000+ Annual Valuation Engagements
No. 1 Global Restructuring Advisor
1,000+ Transactions Completed Valued at More Than $2.5 Trillion Collectively
Corporate Finance
Financial Restructuring Financial and Valuation Advisory
Technology, Media, and Telecom
2000 to 2019 Global M&A Fairness Advisory Rankings
Adv isor Deals
1 Houlihan Lokey 1,057
2 JP Morgan 929
3 Duff & Phelps 734
4 Morgan Stanley 621
5 Bank of America Merrill Lynch 612Refinitiv (formerly known as Thomson Reuters). Announced or completed transactions.
2019 Global Distressed Debt & BankruptcyRestructuring Rankings
Adv isor Deals
1 Houlihan Lokey 76
2 PJT Partners Inc 43
3 Moelis & Co 36
4 Lazard 29
5 AlixPartners 19Source: Refinitiv (formerly known as Thomson Reuters)
2014-2019 M&A Advisory Rankings U.S. Technology, Media, Entertainment & Telecom Transactions Under $1 Billion
Adv isor Deals
1 Houlihan Lokey 198
2 Goldman Sachs & Co 162
3 Raymond James Financial Inc 155
4 Morgan Stanley 154
5 Evercore Partners 144Source: Refinitiv (formerly known as Thomson Reuters)
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