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Party Like It's 2014?

What kind of money is being made where thousands of sweaty kids dance to dubstep and house music? A heck of a lot -- this segment is the fastest-growing live music segment on Earth at the moment. In Europe, Electronic Dance Music, or EDM, has been strong for decades, and the rest of the world is now playing catch-up. 

A DJ can demand upward of a million dollars to play a two-hour set at major clubs around the world. Promoters have made billion-dollar deals with giant conglomerates. SFX Entertainment (NASDAQ: SFXE  ) has pledged that it will spend a record $1 billion on acquisitions in the space, and a recent study put a $15-$20 billion valuation on the genre as a whole. 

Major player
SFX Entertainment filed an IPO last year and raised $260 million in the process. Founder and current leader Robert F.X. Sillerman sold the business to Clear Channel in 2000, which was subsequently bought by Live Nation Entertainment (NYSE: LYV  ) . Sillerman now owns 57% of SFX and he has been making moves, as the company currently has 50 or so possible acquisitions in the pipeline. He would like to buy up all of the promotion companies that he can, and in the process use "...the Internet to connect fans of dance music." 

SFX is not what I would call a solid investment by the numbers. It has a negative free cash flow of -$17 million on $100 million in revenue, $73 million in debt, and only $17 million in cash on the balance sheet. Where the company will get the $1 billion to finance acquisitions is unclear beyond the debt and equity financing of about half that amount. 

Considering the boom/bust nature of the concert and festival production business, these numbers could look much better and possibly even attractive with the coming summer festival season. SFX will put on "Mysteryland," the longest-running EDM festival, in May at the original Woodstock location in Bethel, New York. At $100 for a day ticket and $200 for an average weekend ticket, that is $1.5 million in revenue from the door for 10,000 festival goers. Last year's Coachella Festival generated over $47 million in revenue, so with their scale these festivals could have major impacts on full-year 2014 results. 

Sponsorship partners
SFX really makes its money in corporate sponsorships. On the conference call on March 27, 2014, it announced that it projects $40 million in EBITDA from two corporate partnerships for 2014, and it plans to announce two more large deals prior to May 1, 2014. Later on the call, the company clarified that it had only signed deals that would provide $10 million in EBITDA, but it projected a minimum of $40 million EBITDA to come. Analysts on the call questioned some of the financial assumptions and the off-balance sheet numbers. The CFO stated that the company would address these questions in its 10-K.

The two recent major sponsorship deals involve partnerships with Anheuser-Busch InBev (NYSE: BUD  ) and Clear Channel. With A-B InBev, SFX has integrated Corona beer logos into the stage design without actually putting up banners and logos. The company actually had a totally custom design created to reinforce the brand. As one of the most recognized brands in the world, A-B InBev is a bellwether for marketing dollars and industry trends. It has massive buying power in the advertising and promotions space, as it spends $1.2 billion with the NFL and it has other deals with the MLB. Big businesses are beginning to recognize that EDM festivals give them a way to tap into the cherished youth culture, like what happened with Hip Hop music in the 1990's. In fact, the classic partner 7UP (of Dr Pepper Snapple) has come to EDM with vigor by sponsoring the Ultra Music Festival in Miami during the Winter Music Conference, a  big yearly gathering for the EDM industry. 

The partnership with Clear Channel will produce "...a national DJ/Producer contest in partnership with Beatport; a weekly Beatport Countdown show; and an original live event series." The radio show will see syndication to prominent top 40/pop stations around the U.S and it will feature a top 20 countdown by Beatport, the prominent marketplace and hub for EDM music and news. 

The competitor
Clearly Live Nation, which bought Sillerman's old company through the Clear Channel merger, is poised to compete with SFX. Live Nation produces the annual Electric Daisy Carnival, one of the most notorious festivals in the scene and a major cash cow. In Live Nation's recent earnings announcement, the company stated that festival attendance rose by 800,000 in 2014 "largely due to EDM activity." This makes EDM one of the company's fastest-growing segments. Live Nation posted strong results across the board, with "revenue up 11% to $6.5 billion; adjusted operating income (AOI) up 10% to $505 million; and free cash flow up 9% to $300 million." 

Clearly the EDM genre has been growing substantially as a music trend in the United States, catching up with what is already the leading sound around the world. The big money has begun to properly pour into advertising, marketing, and promotions. These two players have come to the game early with hopes to corner the market. Although SFX Entertainment has some unclear fundamentals, it does have a compelling growth story worth watching for development.

We will want to see how the company manages its growth, along with the terms of the recently announced deals, before we make our investments. In the meantime, Live Nation had a strong 2013 and it projects double-digit growth for 2014. Deferred event revenue is already up 19% year-over-year and concert ticket sales for 2014 are up 12% year-over-year. Live Nation has a diverse business that ranges from Ticketmaster to sponsorships, advertising, and live events, which makes it a more well-rounded bet on the trend.

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