When we cover controversy it usually involves Deadmau5 and Twitter, but on October 8th our bit of controversy comes from the financial sector and involves SFXE (SFX Entertainment.) Seeking Alpha, an investment blog, published an anonymous article blasting SFXE and it’s current status as a smart investment. The article pointed towards a few significant aspects of the company, mainly: it’s $305 million debt and the rating on the debt (Caa1, “to be of poor standing and are subject to very high credit risk”). Also, the way that it burns through the cash reserves of the company while being in said debt, and finally, senior management, namely Robert Sillerman and CFO Richard Rosenstein. The thesis of the post is that Sillerman did wrong against the share holders by not immediately acting upon the 10b5-1 stock purchase plan that Sillerman told his advisors to enter on June 11, 2014. At the time of Sillerman’s initial announcement the stock was priced at $7.90 and closed at $7.92, then proceeded to have marginal growth until its peak at $8.49 on June 23rd. The author argues that if Sillerman believed in his company he would have bought it then and there, or on August 14, 2014 when he again confirmed the plan.
A few hours later Robert Sillerman released his Form 4, which confirms that his group, Sillerman Investment Company III LLC, bought 575,000 shares of SFXE. At the same time that the form started to make its rounds Rich Tullo, an analyst from Albert Fried & Company, an “Institutional Centric” financial services organization, came to the defense of SFXE, claiming that the article was nothing more than a “Short Seller ‘Hit Job.” He added “We place little value on the Seeking Alpha article and its anonymous author. Our view is investors have to view such Media “Intelligence” as potentially sponsored by a short seller or even fraudulent.”
The main points that the SA article used, the massive amounts of debt and spending tendencies, was given another point of view by Tullo. He said that “The fact is SFXE expanded top line by 3 fold over the last 12 months ending in June to $82 million from $27.4 million which makes SFXE the fastest growing Company in our coverage universe. The fact that SFXE expanded revenue by about 300% 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.”
What the author of the original piece failed to realize is that SFXE’s most productive quarter is going to be the third quarter, when TomorrowLand, Electric Zoo and TomorrowWorld’s profits will be hitting the books. While it may not make up for the large amount of debt the company holds, it will show the power of growth in the company now that they have acquired most aspects of the EDM industry (booking agency, ticket distributor, event organizer, PR firm and music distribution.) Tullo ended his piece with a perfect summation of the entire ‘controversy’, putting the anonymous writer in his place and quieting down the flames.
“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.” However the SA article did have a huge impact on the stock; below is the stock price as soon as the article went live. It is a substantial drop, the lowest the stock has ever gone.
The author may have cried wolf but the Wall Street farm thinks it’s all bark and no bite. If, however, SFXE does go bankrupt and default on its debt (which, is a huge possibility) then it will be a significant blow to the EDM industry until the pieces can be sold off. That is, however, the worst case scenario and something that is not an imminent threat. SFXE will move forward and continue to put on the high quality shows that we have come to expect and let the numbers speak for themselves. SFXE closed the days trading at $4.34 a share.
h/t StreetInsider.com and SeekingAlpha.com