The Rumors of SFX’s Death Are Greatly Exaggerated

The schadenfreude is dripping like blueberry vodka from a supersoaker. Seemingly every person alive with a bone to pick with Beatport, with EDM festivals or just with EDM in general has been gloating over Monday’s petition for Chapter 11 bankruptcy from SFX Entertainment, the EDM conglomerate that gobbled up an array of independent promoters and enterprises around the world.

Founded in June 2012, SFX burned through millions of dollars to “get big fast,” purchasing independent promoters, festivals, ticketing companies – even an mp3 shop at a time that mp3s sales were about to collapse – and creating the largest electronic music company (by market cap as well as sheer headcount) from scratch in less than four years.

Yet as the equally profligate Casablanca Records showed us a generation ago, even in a disco wonderland the bills still must come due. And have they ever: among the company’s first day filings is a 476 page spreadsheet listing thousands of SFX’s potential creditors. (If you run a record label or, apparently, operate a Whole Foods Market, you’re probably on it.)

The company – which raised $260 million from its stock IPO – currently lists assets worth $661 million and debts of $490 million. Few of these assets are liquid – after revenue from the company’s stock offering dried up, SFX often relied upon financing from or directly secured by founder Robert FX Sillerman.

Despite outward appearances, SFX never turned a profit.

SFX claims that it anticipates an “orderly” bankruptcy and exiting the process within six months. Sillerman, though he appears to have consented to relinquishing his CEO position, even said in the company’s press release that he is “looking forward to continuing to be part of the new SFX as Chairman.”

Is such a thing possible?

Yes. It’s probably inevitable.

60 Million Little Reasons

The destruction of wealth represented by the letters S, F and X has been profound. The company’s stock price peaked at its IPO at $13.39. Today it’s worth $0.06.

Six. Cents.

At this point, however, SFX’s future is in very friendly, understanding hands. Many of SFX’s “investors” today are entities controlled by none other than the once-and-future chairman himself, the 66 year old dynamo Robert FX Sillerman. One entity called “Sillerman Investment Company III LLC” owns, directly or indirectly, 10% of SFX’s common stock and 100% of the company’s Series A stock, according to the filing. The New York Times says Sillerman’s total comes to “about 40 percent of the company’s shares.”

The press release that announced SFX’s petition for bankruptcy also makes reference to an “ad hoc committee of bondholders” who have teamed up with management to develop the reorganization plan that, with the court’s approval, the company will follow.

With Sillerman in control of a large block of stock, a look at who exactly holds the company’s unsecured debt goes further toward understanding why this orderly bankruptcy process is likely to be quite orderly indeed.

According to the petition, 11 of the company’s 13 largest unsecured “non-insider” creditors hold claims for “deferred purchase price payment.” This is to say: much of the money SFX owes is to the former owners of the same companies that SFX purchased. More than $60 million is listed in these deferred payments to various trusts and entities on behalf of promoters in The Netherlands, Australia and the United States.

To put it crudely: these people have more than 60 million reasons to want SFX to continue, and continue it shall.

Live Nation 4 Life

Moreover, the agreement with the “ad hoc” committee of bondholders functions as a debt-for-equity swap and includes up to $115 million in financing, which will take the bite out of deposits and other costs necessary to operate the company’s festivals. As this so-called “debtor-in-possession” (DIP) financing will convert when the company exits Chapter 11 bankruptcy, you could call SFX’s bankruptcy a sort of “repossession” – or even “refinancing” – with the full cooperation of the lender and the debtor.

When it emerges from bankruptcy, SFX still won’t make money (nobody with a brain speaks of EDM as a “growth industry” these days – not least of all because that “growth” was being driven largely by SFX’s millions). But it appears the refortified company will go on not making money so long as it’s in their lenders’ interests to do so – which might just mean until they can sell off all of these constituent pieces.

Allowing the company to clear its books of $300 million in debt makes SFX (or pieces of it, so rapidly thrown together as they were) a darling of an acquisition target. Ironically, making a big company and selling it to an even bigger one was probably Sillerman’s intention all along, at least in the beginning when he began rolling up small independent promoters into one gigantic cake-tossing powerhouse. This technique of amalgamating small operators into a large corporation was pioneered by Wayne Huizenga (of Blockbuster and Waste Management fame) in the ’80s, and Sillerman himself was a devotee of the same business strategy in the ’90s when he created the behemoth we’ve come to know and mostly loath as Live Nation.

For the largest electronic music entity that ever existed, there’s really only one corporation in the field that’s large enough to absorb it – one and the same Live Nation, merged with Ticketmaster long after Sillerman sold it in the 1990s. They weren’t interested before – hence this embarrassing IPO and the destruction of wealth that came from running a loss-making business into the ground. Would they now?