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Breaking Down the Risks Facing Live Nation

By Motley Fool Staff – Sep 13, 2018 at 11:31AM

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In a vertically integrated business like Live Nation, some of the biggests risks come from regulatory intervention.

In this segment from Industry Focus: Consumer Goods, host Vincent Shen and Motley Fool consumer goods analyst Nick Sciple discuss some interesting aspects of Live Nation's (LYV 1.73%) ownership structure, the company's leverage, regulatory risks, and a rumored merger between it and Sirius XM.

A full transcript follows the video.

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Vincent Shen: Alright, last couple of things for us to discuss from the numbers that I think are worth noting. First, there's some added complexity to the leadership and organizational structure for Live Nation, because Liberty Media, headed by John Malone, has a 34% stake in Live Nation. On the income statement, you'll see a line for net income attributable to non-controlling interests. That's how the Liberty stake manifests itself, not to mention in distributions. About $46 million last year to those non-controlling interests. We're going to probably talk about the Liberty relationship a bit more later on in the show, in terms of some speculation that's come about.

Nick, you also signaled to me a somewhat high debt balance for the company. Is that something that really worries you?

Nick Sciple: At this time, it doesn't really concern me in a major way. If you look at the company's debt to equity, it's about 165%. You look at that number, and it looks scary at first glance. But when you take into account that, in 2017, free cash flow grew about 81%, and we're continuing to see double-digit growth across the business, the company is really in a good place to drive growth. We're also seeing growth in live events, like we talked about last week with Eventbrite. Their business is growing, and they're going to continue to grow free cash flow. I don't think that debt balance is going to be a major long-term concern.

Shen: Yeah, and this is a case where the cash flows really do end up shedding more light on the health of the Live Nation business than their straight earnings, which, over the past several years, they've been in the red for quite a few of those years. Free cash flow, like you said, has been growing. I think it was $500 million in the trailing-12-month period, even though net income, again, shows that negative value. I think I saw $90 million of annual interest payments, but that $500 million of net debt, again, given that strong cash flow, it's not too big of a concern to me in that context.

We've covered the fundamental strength of the Live Nation business model, and looked at how the things break down, in terms of their income statement, in terms of their balance sheet. They have this industry-leading scale and reach, which means a lot of synergy between the various segments. If you control enough major venues, and have the reach that Live Nation does, including in regions outside the United States, you attract the biggest artists. That sells more tickets to event goers, which makes sponsorships and ads to your events that much more attractive. Everything comes together really nicely.

Let's look at the flip side now, in terms of the bear case. What do you think is the No. 1 risk that investors need to consider here?

Sciple: I think the biggest risk for Live Nation is really regulatory. That's been going back all the way to 2010, when Live Nation merged with Ticketmaster. They've been under a consent decree from the Department of Justice about how they should operate the business. They had to divest some assets and license some of their IP as part of that consent decree.

But the real sticky point of that consent decree, which is still relevant today, is that the way Live Nation bundles its services together can raise some regulatory red flags. Live Nation, under the consent decree, is allowed to bundle its services together in any combination; but it's not allowed to punish any potential ticket services customer who may not choose Ticketmaster as their ticketing services company, which is, again, a huge part of Live Nation's profit driver. If an arena or a venue doesn't choose Live Nation for their ticketing services, they can't punish them by not driving artists to those venues and those sorts of things. There have been some accusations earlier this year, I believe it was March, The New York Times had a report out saying that some of live nation's biggest competitors had alleged that Live Nation was, in fact, doing that. If a venue did not choose to use Ticketmaster for their ticketing services, then Live Nation would divert artists away from those venues, and deprive them of the big events that Live Nation drives.

If Live Nation were to be investigated and found guilty of doing these sorts of practices, it would, obviously, significantly impact the business. There'd be some regulatory fees, and perhaps they could be broken up. I think if we're actually looking at the likelihood of that sort of thing being proven, it's a very difficult case to prove. Live Nation can divert artists away using their management arm, if they can just come up with any kind of reasonable business purpose why they would do those sorts of things.

Shen: It's a very tough hurdle for the regulators to overcome, essentially.

Sciple: Correct. It's a very difficult legal standard. So, it's a risk that's there, but I think realistically, seeing what would have to be proved in court, I don't think it's a risk that is going to materialize. I think they're in a very good position.

The one way this risk could come in -- we may talk about this later. We were talking to the Liberty Media rumors. If there were some kind of merger sort of situation, where there's going to be that FTC, DOJ review from an antitrust perspective, that could bring a risk into the company, of that added scrutiny of their business practices.

Shen: Let's just jump right into that, now that you mention it. We know about this Liberty Media stake that they have, 34% in Live Nation. There's been talks for some time now about the big empire that John Malone controls, also includes parts of Sirius XM, for example, how things might get rolled together there. Again, this is more in the rumor mill than anything. But what would that look like?

Sciple: Liberty CEO Greg Maffei has stated explicitly on a number of occasions that he would like to bring that media empire together and streamline it. What it would look like, it would be a merger or some kind of combination between Sirius XM and Live Nation. What would be attractive about that, from a business perspective, is you have Sirius XM, which, as a business, is generating free cash flow, but there's really not anywhere else to deploy it within their core business. And you've got Live Nation, which, as we discussed, is relatively highly levered, and is in the same industry. It would make sense, if they were combined, that you could use Sirius' free cash flow to help drive that continued growth from Live Nation and help that debt perspective. And as well, there are the synergies there that are obvious, in that they're both in the music business and they can do some cross-promotion there.

But, again, as I mentioned earlier, I think while there is some merit to that from a business perspective, the regulatory risk would probably be higher under those circumstances. If I were a Live Nation shareholder, I'd be perfectly fine with the business operating as it currently does. I think it's in a great position to continue driving growth, just through the synergies and the vertical integration of the business.

Shen: Again, if we haven't painted this picture clear enough already with ticketing, this Ticketmaster part of the business is really a force to be reckoned with. As a potential shareholder, I think the risk is relatively small, in terms of the regulatory side, given that they are a bit hamstrung by some of the vague guidance in that consent decree that you mentioned. As a consumer, though, I know that I'm not the only person who balks at the high service fees that Ticketmaster often charges. There aren't that many viable alternatives for these large popular events. Kind of a conflicting situation there as a shareholder and as a consumer. Not exactly the competitive environment that we want to see.

Nick Sciple has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Live Nation Entertainment and The New York Times. The Motley Fool has a disclosure policy.

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