(CelebrityAccess MediaWire) – As Clear Channel Entertainment enters the final phases of stepping away from its parent company, speculation is rampant throughout the touring industry as to the possible response from investors and how the move will affect the biz.
Despite a few potential buyers that showed interest in the company, offers never reached the $2 billion price tag many at Clear Channel Communications were hoping to fetch. CCE, currently operating as CCE Spinco, set the spinoff process in motion, and will be a free-standing, publicly traded company under president/CEO Michael Rapino by the end of this year.
The degree to which the move affects the concert industry depends largely on the capital structure of the new company, and the response by investors to an initial public offering.
Due to an SEC-imposed quiet period before the official split, CCC and CCE Spinco officials cannot comment on the IPO, according to Billboard.biz.
Rapino stated on October 26th that the corporate spinoff would give the new entity “incredible new freedom to operate a more nimble and dynamic young company.”
Many are looking to the split to bring some stability to the currently volatile industry, which is still reeling from the massive roll-up in the late 1990s that led to the SFX – and later the CCE – multi-billion dollar promoter conglomerate.
According to Billboard.biz, Wall Street is viewing the sell-off as more a relief for CCC than an opportunity to invest in an exciting new live entertainment company.
“We view the spinoff of the live entertainment division as a wise decision by Clear Channel management,” analyst Maurice McKenzie, VP of media research for Friedman, Billings, Ramsey & Co. told the magazine.
“The spin will allow Clear Channel Senior Management to focus on its core businesses – radio and outdoor – while allowing investors to diversify their own portfolios,” he continued. “As a stand-alone entity, we expect the entertainment division to continue to encounter the vicissitude of a seasonal entertainment business, and [they] could see that volatility reflected in the stand-alone shares of Clear Channel Entertainment.”
McKenzie told Billboard.biz that many investors see CCC’s move in the live entertainment market as a somewhat failed experiment or, at best, an unpredictable one. The slim margins and unstable nature of the concert business may prove to be unpalatable for some investors.
“We know that the underlying business has been a difficult business, in our opinion, to manage and has shown much more volatility than Clear Channel’s overall business,” McKenzie told the magazine.
Rapino and CCE Spinco, however, have made moves to streamline the operation by laying off employees and closing unprofitable offices. Rapino said the changes would lead to “a much more focused approach to the business than what we’ve done in the last few years.”
While Rapino expects investor reaction to be positive, CCE is still carrying debts from the consolidation years, and has yet to show a profit. But when earnings before interest, taxes, depreciation and amortization are examined, the company can claim some positive performance numbers.
Profits have declined for the company over the past few years, following the overall industry slump. McKenzie referred to the negative trend, saying, “That implies to me something that is very difficult to manage.”
Many believe that some discipline has been brought to bear in terms of buying talent under Rapino’s leadership, which investors may view favorably in hopes of reversing the industry decline for the better.
The fate of the new company may depend on the results of the IPO and CCC’s plans for capitalizing the new company.
Clear Channel Communications CFO Randall Mays told Billboard.biz earlier in the year that CCE Spinco would “be appropriately capitalized for its business and its growth needs.” He added, “Levels in the amount of debt within CCE are going to be subject to capital market conditions closer to the execution of the spinoff.”
It does not seem likely that CCE Spinco will be set entirely free from its mountain of debt, which would turn the company into a potentially profitable venture.
“My expectation is, what is good for Clear Channel shareholders also is good for those shareholders who will receive as a portion of their value the CCE spin,” McKenzie said. “They’re going to ensure that it is a capital structure that is appropriate for the volatility” in this market.
Even so, McKenzie does not see any large anticipation on the part of investors regarding the CCE Spinco IPO.
“The buzz is really around the streamlining, as we see it, of Clear Channel Communications,” he told the magazine.
Those in the live entertainment business are also closely watching the IPO, but no one is ready to make any predictions.
“It is hard for me to give you any type of analytical comment about the spinoff since I have no idea what the eventual market cap of the new entity will be and how deep their financial resources will be absent their 800-pound parent,” AEG Live CEO Randy Phillips told Billboard.biz. “Rapino says it will be a ‘more nimble and dynamic young company,’ so I will take him at his word, since the predecessor was anything but.”
Jam Productions co-CEO Jerry Mickelson, a vocal opponent of CCE business practices who is currently involved in a multi-million dollar lawsuit with the company, has his doubts about how CCE Spinco will fare in the IPO.
“While Rapino seems like a nice guy, I do not believe Wall Street will buy into him, due to his lack of experience in running a publicly traded company,” he told the magazine.
All agree that whatever happens with the CCE Spinco IPO, the concert industry will change in 2006. If CCC will be able to focus more on its core businesses, so too will the new live entertainment company.
“At the end of the day, we’re a music company,” Rapino said at the Billboard Touring Conference. “We make 90% of our profit as a venue and music company.”
Alex Hodges, executive VP at House of Blues Concerts, agreed that the new Rapino-led company should be more focused.
“The question will be about raising capital and their ability to make offers more representative of an artist’s ability to draw in the marketplace,” he told Billboard.biz. “I think they will have to act differently in that sense.”
AEG’s Phillips is looking for Rapino to distance the new company from CCC’s typically anti-competitive nature. Rapino has hinted that the new company will be more cooperative, perhaps even opening up CCE venues to other promoters.
“At AEG Live, we are never in many joint ventures with other players and have never excluded anyone from using our facilities if they are the choice of the artist and their reps,” Phillips told the magazine. “If this is the type of change Rapino is alluding to, we, speaking for AEG, will meet them with open arms and an open mind.”
Hodges sees the split as a possible catalyst for a relationship change between radio and the concert industry.
“I think the lack of synergy with radio that [CCE] experienced will probably change things in general in that the promoters and radio stations will have a more familiar, historic relationship,” Hodges said. “Actually, that may improve things for all promoters, including [CCE] promoters.”
Many are also looking at the promoter hierarchy, which has typically been led by CCE in the past. Last year, CCE was the number one promoter with $1.4 billion in gross box office dollars, AEG was number two with $454 million, followed by House of Blues with $250 million, according to CelebrityAccess/Billboard Box Office Scores. Providing that CCE Spinco is properly capitalized, predictions are that the hierarchy will stay the same.
If the company is not fully capitalized, “then you’ll see the landscape change significantly,” said Hodges. –by CelebrityAccess Staff Writers