Valuing Music Assets David Dunn Shot Tower Capital
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Valuing Music Assets David Dunn Shot Tower Capital August 2019 Shot Tower Recent Assignments Shot Tower advised on the largest global music transaction in 2018 (EMI), 2017 (Imagem) EMI Music Publishing Codigo Entertainment sale to Prince Estate New Recorded Imagem sale of Phil Collins Jackson Estate New Sale of Imagem to Concord and 2016 (Sony/ATV), sale to Sony Corporation Concord Music Group Music Agreement publishing to Hit N’ Run Recorded Music Agreement Music Group representing in excess Sell-Side Advisor Sell-Side Advisor Financial Advisor Sell-Side Advisor Financial Advisor Sell-Side Advisor of $6 billion of total (Exclusive) (Exclusive) (Exclusive) transaction value. Select recent music valuation and valuation advisory assignments Jackson Estate on New Valuation services to Roc Valuation of Intellectual Valuation services to Roc Jackson Estate on the sale of Nettwerk Music Group on include Estates of Administration Agreement Nation Sports Management Property Assets Nation Recorded Music 50% interest in Sony/ATV sale of its Music Publishing Aretha Franklin, for MIJAC Assets to Kobalt Michael Jackson, Mac Financial Advisor Valuation Services Valuation Services Valuation Services Sell-Side Advisor Sell-Side Advisor Miller, Prince, Elizabeth (Exclusive) (Exclusive) Taylor and Robin Williams Fintage on the sale of its Jackson Estate Cirque du Ease Entertainment Services Valuation of Intellectual WPT sale to Ourgame Verse Music on its sale to music businesses to Kobalt Soleil Shows on its sale to Property Assets International BMG Rights Management Entertainment Partners Sell-Side Advisor Financial Advisor Sell-Side Advisor Valuation Services Advisor Sell-Side Advisor (Exclusive) (Exclusive) (Exclusive) CONFIDENTIAL | 2 Music Publishing vs. Recorded Music MUSIC COMPOSITION MASTER RECORDING Recorded performance of a Words and lyrics composition Royalty income paid on every Royalty income paid only on the version of the song specific recording of a song Monetization and exploitation is the Monetization and exploitation is the responsibility of a music publisher responsibility of a record label Royalty income typically split Record label typically owns the master between a publisher (NPS) and a recording and the performance artist songwriter (writer’s share) receives a royalty CONFIDENTIAL | 3 Music Catalog vs. Music Company Definition Music Catalog The term catalog is usually used to reference a collection of songs owned by a publisher or (IP Rights) songwriter or a collection of master recordings owned by a record label or performing artist. Music Publisher A music publisher works with songwriters to market and promote their songs, resulting in (Company) exposure of songs to the public and income generation. Music publishers "pitch" songs to record labels, movie and television producers and others who use music, then license the right to use the song and collect fees for the usage. - May own an interest in the copyright subject to the Copyright Act of 1976 (publishing catalog); or - Perform exploitation and royalty collection services without ownership under an administration arrangement. Record Label A record label identifies songs and works with producers and artists to create, market and (Company) promote the recordings. The label also coordinates manufacturing and distribution of physical product and licensing of the recording for other uses. - The label typically owns the master recording with the performing artist receiving a percentage fee depending on the nature of the sale or use of the recording (recorded music catalog); - In some instances, the recording artist and the label may form a joint venture entitling the artist to a 50% profit share after expenses. CONFIDENTIAL | 4 Music Sources of Income Streaming ▪ Key driver behind the industry’s return to growth. Over the past decade, streaming went from 1% of recorded revenue to 47% and is expected to continue growing. ▪ Spotify and Apple Music are global leaders, holding ~60% of paid streaming market share. ▪ Access, convenience and personalization continues to boost music consumption and engagement. Performance Rights ▪ Analog radio continues to be a dominant form of music consumption despite displacement by streaming services among younger generations. ▪ The ad-funded landscape is dominated by YouTube, who has been under immense pressure from industry professionals to return more revenue to content creators. Synchronization ▪ Increasing number of content creators (e.g., social media, user-generated, film & tv, etc.) and rising content consumption opens the door to more synch opportunities for rights holders. ▪ Becoming an important source of discoverability for music listeners, rivaling traditional mediums. ▪ Film soundtracks were one of Nielsen’s five 2018 year-end music trends, displaying the influence of synchs. Digital Downloads ▪ Consumer preference for digital downloads has been replaced by streaming services as consumers prefer access over ownership. In addition, several streaming platforms provide premium users with full download capabilities, removing the need to purchase individual songs and albums to store on a digital device. ▪ Analysts expect digital downloads to continue declining between 10% – 20% over the next decade. Physical ▪ Largest driver of industry declines over the past decade as consumers transitioned from physical to digital formats. ▪ Still accounted for 25% of recorded sales in 2018 and continues to be the largest revenue source in major music markets, such as Japan (71% of market share) and Germany (35% of market share). ▪ Vinyl continues to be the bright spot in physical formats with sales growing 6.0% in 2018 per IFPI. CONFIDENTIAL | 5 Key Cash Flow Metrics MUSIC COMPOSITION MASTER RECORDING Revenue / Gross Royalties C Revenue / Sales / Royalties A Less Writer Royalties T Less Artist Royalties A Less Administration Costs L Less Manufacturing and O Distribution Costs G = Net Publisher’s Share = Net Label’s Share Less Operating Expenses Less Operating Expenses - Artist & Repertoire C - Artist & Repertoire - Licensing - Licensing O - G&A - G&A - Talent Expense M - Talent Expense = EBITDA P = EBITDA A Amortization N Amortization Advances Advances Recoupments Y Recoupments Capital Expenditures Capital Expenditures CONFIDENTIAL | 6 Key Valuation Considerations ASSET OR COMPANY SPECIFIC MACRO Duration of Rights U.S. Copyright Act of 1976 Media Backdrop Ex. U.S. Law Streaming Services Growth Rates Contractual Retention Periods Advertising Market Expectation of Diminution TV/Film/Video Streaming (Front list/Catalog/Evergreen) Control of Exploitation Legal Backdrop Administration Blanket License Rates None (Passive) Compulsory Licenses Approval Rights Consent Decrees Co-Publishing Territorial Differences Full Control Cost of Exploitation Tax and Cost of Capital Functions (e.g., A&R) Interest Rates Operating Costs Tax (Rates and Amortization) Administration Buyer Target Returns CONFIDENTIAL | 7 Music Valuation Methodologies ▪ Based upon a projection forecast, the DCF analysis discounts all expected future cash flows to their present value; favors high free cash flow enterprises. DISCOUNTED ▪ Advantageous for growth businesses expecting to increase terminal year cash flow. CASH FLOW ▪ Heavily influenced by the expected rate of return or weighted average cost of capital (WACC) and the assumed terminal exit multiple. ▪ Investor returns analysis derives a value for a business based upon a likely investor’s INVESTOR required rate of return and assumed exit value, which are directly influenced by the RETURNS quality of the operating business or catalog being acquired. ANALYSIS ▪ Based on unlevered and levered equity capital structures. ▪ Relies on the purchase multiples recently paid for similar businesses or catalogs to derive an implied market value for a company or catalog. MARKET ▪ Applies an NPS/NLS or EBITDA multiple, whether a catalog or company, based on MULTIPLE recent precedent transactions. ANALYSIS ▪ As music publishing and master recording rights differ based on the nature of rights and opportunities, this analysis provides an instructive guide but is not dispositive. CONFIDENTIAL | 8 Positive Secular U.S. Industry Trends – H1 2019 vs. H1 2018 While royalties generated U.S. MUSIC CONSUMPTION U.S. MUSIC CONSUMPTION/SALES BY FORMAT 1 from physical ownership of music continue to decline, Overall Music growth in music streaming Audio Vinyl has led to an overall Consumption Streams Albums increase in music consumption and revenues comparable to the 1990s. From a consumer perspective, streaming is a great product and is Formats Growing driving the consumption of +15.7% +27.8% +9.6% music. While there is reason to be optimistic, the Total Consumption 2 ability of Spotify and other Physical Digital 1 Album = 10 Downloads = 1,500 Streams standalone services to (units in millions) profitably sustain service Albums Albums offerings is crucial to the financial health of the 351.6 music industry. 304.0 Declining Declining Formats -15.1% -24.4% H1 2018 H1 2019 Source: Nielsen Music Mid-Year Report, U.S. 2019. 1. Audio streams measured as number of streams, while vinyl albums, physical albums and digital albums measured by sales. 2. Nielsen’s measurement of total consumption includes the number of physical and digital albums that were sold and the total number of album equivalent songs from downloads and song streaming volume. Track equivalent albums ratio for Nielsen represents a ratio of 10 tracks to 1 album and a streaming equivalent albums ratio