January 5, 2017 / 6:48 PM / in 10 months

Blackstone's new investment tune hits right notes

NEW YORK (Reuters Breakingviews) - Blackstone is going long music. For its first venture into buying and holding companies for extended periods of time, the private-equity firm is taking over SESAC, a group that manages song rights for the likes of Bob Dylan and Mariah Carey. The growth of streaming provides a steady outlook. With some financial improvisation, it’s easy to compose a healthy return.

Rock musician Bob Dylan performs at the Wiltern Theatre in Los Angeles, U.S., May 5, 2004. REUTERS/Rob Galbraith/File Photo - RTSS2FE

The deal for the for-profit Nashville-based operation, which competes with larger non-profits ASCAP and BMI, is the first from Blackstone’s new $5 billion fund that plans to hang on to acquisitions for at least a decade, far longer than a typical leveraged buyout. It also marks the firm’s first jump into the music business, which is enjoying a bit of a renaissance. 

Spotify, Apple and others have breathed fresh life into subscription models after years of struggling to figure out the digital market. Revenue from streaming music is expected to rise tenfold, to about $14 billion by 2030, according to estimates by Goldman Sachs. 

By owning a middleman like SESAC, Blackstone may capitalize on the new groove. In 2013, Rizvi Traverse bought 75 percent of the licensing and collection organization at a $600 million valuation, Billboard reported at the time. That would have been about 15 times SESAC’s $40 million in EBITDA.

By 2015, EBITDA had grown to roughly $60 million, according to credit-rating firm Moody’s Investors Service. Apply the same imputed multiple as in the Rizvi transaction and SESAC could have been valued at $900 million, though Blackstone isn’t saying. 

So assuming Blackstone bought the whole company, a $450 million equity check would be a reasonable estimate alongside approximately $450 million in gross debt on SESAC’s books. Moody’s said last year it expected “continued revenue and EBITDA growth in the mid-to-high single-digit range.” At, say, 7 percent, the EBITDA figure would double to about $120 million in a decade.

At the same 15 times valuation multiple and with no change in total debt, Blackstone would triple its equity by 2027 for a 12 percent annualized return even without paying itself any dividends along the way as Rizvi has done. That would be an investment tune that hits the right notes.

CONTEXT NEWS

- Blackstone said on Jan. 4 it had agreed to buy music-rights organization SESAC from private-equity firm Rizvi Traverse Management. The deal is Blackstone’s first from a new fund designed to hold companies for at least a decade, longer than a typical leveraged buyout.

- The purchase price was not disclosed, but Rizvi acquired a 75 percent stake in the Nashville-based Society of European Stage Authors and Composers for $450 million in 2013, according to a contemporaneous report by music-industry magazine Billboard, citing unnamed sources.

- Allen & Co advised SESAC, Moelis advised Blackstone and Goldman Sachs advised Rizvi. Jefferies is providing debt financing for the deal.

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