Oct 08, 2014
Sillerman Goes All In On SFX Amid Doubts Of Company’s Health

Robert FX Sillerman reported purchasing $2.8 million worth of shares in his electronic music holdings company SFX Entertainment (SFXE) today after reports surfaced that the CEO had yet to follow through on his promise to do so, sparking debate over the company’s future.

Sillerman filed a Form 4 with the US Securities And Exchange Commission as required, disclosing the purchase of a total 575,000 shares by his Sillerman Investment Company III LLC of his own SFXE and adding to his existing 26.25 million shares for a total of 26.8 million shares or roughly 30 percent of the company not including shares unvested or included as part of his employment.

While it doesn’t shift power or even measure up to the massive pile already held by his LLC, the move was made public just hours after SFX Entertainment found itself a popular topic of discussion resulting from a Seeking Alpha report speculating that the company is financially unstable, and its investors are not only aware, but taking steps to protect themselves from losses.

Citing a number of “red flags,” it focuses on the unfulfilled commitment made by Sillerman to invest further in the company as detailed in his June 11 announcement of a 10b5-1 plan, which publicly discloses company insiders’ intention of purchasing stock–in this case Sillerman himself–over the course of a year to a maximum of 2 million shares. The author argues that this is a sign that SFX, which controls a majority stake in electronic music entities from ID&T (the company behind Tomorrowland, et al.) and Made Event (Electric Zoo) to Beatport and more, is at risk of going bankrupt due to its mounting debt combined with no operating leverage.

Posts on the crowdsourced investment research outlet Seeking Alpha are written anonymously, however disclosed where the byline should be is each contributor’s short-long position in relation to the company’s publicly traded stock prices, revealing each author’s potential opportunity to profit from the company’s sudden rise or fall in share value. The author in question is “short SFXE,” meaning it’s in his or her best interest to see the stock price fall. With this in mind, the post argues that, despite being billed as the heavyweight built to conquer dance music, research suggests SFX Entertainment has more in common with its live event properties than previously thought–specifically the “smoke-and-mirrors” aspect.

[Sillerman] said, “I announced a 10b5 program, which will have a term of one year, where I will acquire or seek to acquire up to 2 million additional shares. There’s no greater expression of my confidence in the platform, the people who are achieving this and most importantly the loyalty and affection of our fans; they are here to stay.”

This announcement saw SFXE’s price rise 4 percent to end the day at $6.75 before beginning a slow three-month slide to its current price of just over $4.

sfx price 3 month

In short, Seeking Alpha alleges that Sillerman is welching on his promise of purchasing shares of SFXE, at least while their price continues to fall, because he “doesn’t want to throw his money away,” showing a lack of faith in his own company.

The news of Sillerman’s purchase broke shortly after.

Albert Fried & Co. analyst Rich Tullo argues in defense of SFX, saying the company is in fine shape, and the Seeking Alpha report is an attempt to drive down the price of shares.

“We think a short seller has planted the seed that Robert Sillerman’s $5 million share repurchase is meaningful when the reality is sellers may have driven the share price down $300 million on the lack of purchase. We think buying or selling shares solely on the management’s failure to buy $5 million worth of stock is an extreme emotional reaction.”

Seeking Alpha also cites the lack of disclosure in SFX’ recent 8-K filings of significant deals (materially definitive agreements) allegedly totalling over $50 million, which are required by the SEC to be divulged in regular 8-Ks as they occur–suspicious, but not damnable evidence in the case for SFX’ continued survival.

However, SFXE added another $85 million to its debt Sept. 24 in second lien senior secured notes that are deemed default risks by investor service Moody’s, allegedly as a method of patching their ruptured cash reserves (which fell from roughly $106 to $59 million during Q2 2014). SFX’ debt now totals over $300 million, all due in 2019. Seeking Alpha highlights SFX’ quickly growing debt as compared with the company’s contrastingly low level of income, arguing that it has little chance to see justifiable returns and emerge from the hole that resulted from its acquisition sprees. Additionally, according to a report by the Wall Street Journal Sept. 11, Sillerman was selling off $107 million of his own real estate properties while SFX took on this new batch of debt, although this is likely more closely related to his $2.8 million purchase.

Tullo rebutts this diagnosis of a impending death for SFX by pointing out that the company nearly tripled its 12-month gross income from 2013 as of June 30, exhibiting money-making potential despite considering the company’s 77-percent increase in net loss over Q2 as previously reported.

“The fact that SFXE expanded revenue by about 300 percent and Adjusted Cash Out-Flow (AOCF or EBITDA) expanded at a slower rate to roughly $21 million in 2Q14E from roughly $15 million in 2Q13A suggests to us there is potentially significant operating leverage in the SFXE model.”

While SFX indeed bolstered gross income significantly since its June ’13 IPO, this can largely be attributed to its many acquisitions including Tunezy, Arc90, Fame House, Made Event, Totem OneLove, and so on–essentially a threefold increase in properties. While the company’s massive spending habits and even bigger debt obligations paint an uncertain picture of the entertainment giant’s future, as Tullo points out, these “red flags” can safely be considered as such only in the context of being used to strategically incite panic among investors.

As today’s events continue to unfold, SFXE has already dealt in six times its average daily volume at the time of publication.

Read the complete Seeking Alpha report here and Tullo’s reply here.

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