SPACInsider contributor Eric Weidemann this week compiled his three favorite potential SPAC targets holding valuable music copyright catalogs. We look at why they are compelling and why each could be a fit for a blank-check merger.
As Australian singer-songwriter Peter Allen once sung, “Everything Old Is New Again”. That is especially true of music like Allen’s these days.
German record label Bertelsman (DE:BTGG) reported last year that while its overall streaming revenue was up 26%, revenue from tunes at least three years old outpaced the wider group and was up 49%. This trend was echoed by Universal, which saw its deeper catalog account for a majority of its digital revenue.
The pandemic surely played a role in this as new releases were not getting quite the same pop by virtue of not debuting with world tours and live events. But, the numbers have been trending this way for some time as listeners are increasingly discovering jams through the broad offerings of streaming services rather than whatever new hits are blaring out of the radio.
This has big implications for the business of music as record labels such as Universal traditionally spend more than half of their operational funds into developing and discovering new artists, meanwhile, it’s the old hits on the shelf that are churning the company’s profits.
Access Industries spun off Warner Music Group (NASDAQ:WMG) in June to unlock value from its catalog and Vivendi (PA:VIV) plans to do the same with Universal Music Group before the end of 2021. SPACs have jumped on stage as well with Roth CH II (NASDAQ:ROCC)’s April announcement of a deal with music copyright investor Reservoir Holdings.
Among SPACs still searching, only The Music Acquisition Corporation (NYSE:TMAC) has set “music” as its primary target focus, but 10 more are searching for a target in media of some form – OPA, NBST, ISOS, ANAC, BTNB, VOSO, GNAC, BLTS, HTPA, and HZON. That doesn’t mean the next music deal will necessarily come from this group, however. Roth CH II listed initially looking at the “business services, consumer, healthcare, technology, wellness [and] sustainability sectors.”
Concord Music Publishing
SPACs may also be willing to turn the dial from their initial focus to talk to Concord Music.
It has spent over $1 billion on acquisitions to grow its already large-scale catalog over the past four years and its appetite does not appear to be anywhere near sated. In January 2020, it paid $100 million to take a majority stake in pop music publisher Pulse, which holds Drake and Megan Thee Stallion copyrights.
Concord then paid down $600 million in debt in an August 2020 refinancing, only to turn around and spend about $100 million to take over Imagine Dragons’ catalog and another $400 million to purchase Downtown ‘s entire catalog in April.
This last buy expanded Concord’s portfolio to over 600,000 works and brought in a mix of new stars like Bruno Mars, Lady Gaga and Sam Smith alongside classic works from Aretha Franklin, David Bowie and Marvin Gaye.
The company was valued at about $2 billion even before this shopping spree, and raked in about $500 million in revenue per year when its catalog was 30% smaller.
A SPAC would presumably not have to bargain too hard to wrench a stake away Concord, as state pension fund Michigan Retirement Systems owns about 93% of the company. While its stake in Concord has ballooned in value over the past several years, the company would have the potential to provide more flexible and passive income to the fund as a listed entity rather than a private business.
Unlike Concord’s broad catalog conquests, Primary Wave has plowed its resources into more surgical acquisitions of “legends and icons” properties, using about $800 million to acquire 16,000 copyrights as of November 2020.
Primary Wave also differs in that it takes on the role of marketing and branding its catalog, work that most copyright funds like Concord typically outsource to partners. Primary Wave CEO Larry Mestel got his start through deep relationships, working with Courtney Love to acquire about half of Kurt Cobain’s song catalog in 2006.
The company’s catalog now counts legends like Bob Marley, Ray Charles and Smokey Robinson alongside icons like Whitney Houston, John Lennon and Steven Tyler. In December, Primary Wave acquired an 80% stake in Stevie Nicks’ catalog and earlier this month bought up the royalty stream on Rihanna’s first seven albums.
Financially, there are many reasons why Primary Wave could see a SPAC combination as the way forward. Mestel said last year a public listing was among the possibilities it saw for future financing and BlackRock led its 2016 $300 million acquisition fund. BlackRock is an avid PIPE participant and would be a valuable go-between for SPACs curious about Primary Wave.
Primary Wave has also funded its past acquisition campaigns entirely with equity and carries zero debt. While this is an admirable approach, the company has a finite amount of private equity to offer. A SPAC combination could give it access to public market capital that could see it continue on its debt-free path without sacrificing its aggressive pace.
While the old may be new, this is still a rapidly changing media world. Many internet creators are running circles around legacy media outlets in terms of views and they aren’t likely to shell out the licensing fees to toss a Stevie Wonder song into their Youtube clip or TikTok dance.
Epidemic Sound provides 32,000 music tracks and 60,000 sound effects to creators looking to have a variety of audio options for their content that is commercially accessible for $49 per month, or $15 for personal use. This had been a relatively small niche service and the Sweden-based company had raised just under $60 million in outside funding from its founding in 2009 to March of this year.
But, the company’s usage has quadrupled from its tracks playing for an average of 250 million hours per month on Youtube in 2019 to well over 1 billion hours a month now. With those winds under its wings, it raised $450 million from Blackstone and EQT Growth in March at a valuation of around $1.4 billion.
It now has a two-sided marketplace where users can create and monetize their own tunes, allowing Epidemic Sound’s catalog to grow passively over time. This makes it a unique asset in the music world, as its portfolio simultaneously does not contain multi-platinum records, but videos containing its music are streamed about 1.5 billion times per day.
That last monster funding round does not put it in immediate need of bringing in fresh cash, but a SPAC team with some deep media expertise could surely find some interesting ways to put it to work beyond the company’s existing business model. The company also provides an interesting avenue for investing in the rise of internet media and Gen Z entertainment, which is sure to entice sponsors and retail investors alike.
Epidemic Sound was reportedly considering an IPO last year before agreeing to the raise. Given the investors involved, it may well serve as a pre-listing launchpad that a SPAC could facilitate.