Description

SUMMARY

- Live Nation (LYV) is the world’s largest live events and ticketing company.

- At the current quote ($8.55), you are buying an unregulated monopoly at 5.7x 2012 EBITDA/6.3x 2012 FCF with massive growth opportunities and a potential acquirer in the form of Liberty Media (currently the largest shareholder at 21%).

- Given the high barriers to entry and opportunity to double EBITDA over the next several years, we believe a reasonable valuation would be 8x 2012 EBITDA, implying a $16 stock price, or a 90% premium to the current price.

*Note: In their filings, LYV refers to EBITDA as Adjusted Operating Income (or AOI).

BUSINESS DESCRIPTION

LYV has a vertically integrated business model and through its 5 divisions covers all aspects of the live music production process from booking an artist to selling tickets and maintaining fan websites. LYV has the #1 market share (by multiples compared to the next largest competitor) in almost every business line:

INVESTMENT THESIS

Artist Touring is Secularly Growing

Historically artists generated the majority of their income from selling records. Given the proliferation of digital music sharing, artists now make 80% of income through touring. As recording revenues continue to decline, LYV’s bargaining power with artists improves. This is a secular trend that benefits LYV and is in stark contrast to the rest of the media space, where technology disruption is dis-intermediating entire industries. The live entertainment experience is not something that can be easily replicated at home or on the internet.

High Barriers to Entry: Why the Artist Chooses Live Nation and Why Venues Choose Ticketmaster

What differentiates LYV from competitors is its ability to leverage all parts of its supply chain for the benefit of the artist and the venue.

For the artist, LYV is a one-stop shop. Through LYV, the artist has access to its 200mm concertgoer database, 128 owned/operated venues, merchandising services and fan websites management.

Similarly, for the venue, LYV can bring to the table their extensive database of concertgoers, the best content, and the security and reliability of Ticketmaster. Before Live Nation merged with Ticketmaster, Live Nation tried to build their own ticketing platform with CTS Eventim; this turned into a complete failure as the CTS platform could not handle the volume of ticket transactions in some of Live Nation’s events. Indeed, there is a lot of technological competence that goes into ensuring the smooth sale of millions of tickets the minute a Phish concert goes on sale.

Attractive Growth Opportunities

At Liberty Media’s Investor Day on November 17th, CEO Michael Rapino presented a framework for doubling EBITDA over the next several years primarily through 1) international expansion 2) growing high-margin sponsorship and advertising sales, and 3) selling more tickets and capturing some of the secondary market through dynamic pricing.

1. International Expansion ($120mm EBITDA opportunity) – The international concert industry is growing at a 10% clip, or 4-5x faster than the NA/Western European markets. The global concert industry is a $12bn market today, where LYV has a 30% share. In NA, LYV has 60% market share of the concert industry, which implies that outside of NA, LYV only has a 15% market share. Management has identified a $4bn opportunity in international markets, which implies capturing market share close to where they are in theU.S. Each 10% increase in global market share represents $1.2bn topline opportunity, or an incremental $36mm of EBITDA (at 3% incremental margins).
2. Sponsorship & Advertising ($130mm EBITDA opportunity) – The market size for music sponsorship is $2.5bn with LYV currently commanding a 7% share. Management believes there is an additional $200mm top-line opportunity ($130mm EBITDA) for them to take their fair share of the market. Additionally, given that Ticketmaster.com is the 3^rd largest e-commerce site behind Amazon.com and Staples.com and attracts ~13mm unique visitors/month, there is also ample opportunity to grow online advertising revenue.
3. Capturing More Gross Ticket Sales ($180mm EBITDA opportunity) – On top of e-mail lists, LYV is tapping into new channels such as social networking, GroupOn, and mobile apps to increase awareness of concerts. Since 40% of all concert tickets go unsold, the ability to increase attendance brings with it a large EBITDA opportunity given the high incremental margins on ticket fees and ancillary sales (food/beverage & merchandise). A 10% increase in awareness would lead to $100mm of EBITDA. One of the more exciting opportunities for LYV is capturing a larger share of the secondary market. Currently concert tickets are not priced according to supply/demand; hence, for popular acts such as U2, most concertgoers are paying multiples of the face value of the ticket through secondary channels such as StubHub. To recapture the lost opportunity in the secondary market, LYV will be rolling out a real-time dynamic pricing model in 2012, effectively charging higher upfront ticket prices for the best seats in top acts, and lower prices for back-of-the-house seats in less popular acts. The net effect would be to increase attendance and maximize sales. Test shows using dynamic pricing have yielded on average a 20% increase in sales. A 10% recapture of the secondary market would lead to an $80mm EBITDA opportunity.

Liberty has up to $5bn of capital to deploy…

One can logically speculate that a good chunk of that will be used to buy LYV stock. Under the current stockholder agreement, Liberty can take their ownership stake up to 35% (from their current 21%). Note that in January 2010, Liberty unsuccessfully tendered for 34.5mm shares of LYV at $12/share.

ESTIMATES & PRICE TARGET

Note that in my 2012 estimates, I do not give LYV much credit for any of the growth opportunities highlighted above.

1. Economic weakness – Concert tickets are discretionary purchases that may be impacted by a tough economy. However, concert revenues have not historically shown correlation with disposable income or GDP growth. Since the average person only attends 2 concerts per year, customers may be willing to sacrifice spending in other areas to watch their favorite artists perform live. The health of the concert industry may better be measured by the strength of the touring slate. 
2. Ticketing competition becomes a viable threat – Ticketmaster has historically renewed at a 95% rate on their ticketing contracts. Given the vital importance ticket distribution has with venues and the value of the content and scale LYV offers to these venues, we think they will continue to renew at historically high rates.
3. Concert touring slate is subpar – Take it for what it’s worth but management has talked about a “better” concert slate in 2012 than in 2011.
4. NBA lockout continues – This is a $10mm EBITDA hit in Q4’11.
5. Management fails to execute

Catalyst

1. Management continues to execute and beat EBITDA estimates
2. Liberty buys more stock
3. Announcement of big touring acts
4. NBA lockout ends