josepmarti
Live Nation (NYSE:LYV) currently finds itself in the middle of a regulatory and public opinion storm, where many customers and lawmakers have been pushing for action to be taken to reduce the strength of Live Nation and its subsidiary Ticketmaster’s competitive positioning.
As we’ll explore, this public sentiment seems to have taken the market’s attention away from the true likeliness of damaging action from the DOJ.
In this article, we attempt to bring expectations closer to what is probable, showing how this situation presents a unique opportunity to enter a high-quality business at a historical discount.
Company Overview
Segments
Live Nation’s operations are disaggregated into three segments:
1 – Concerts
Where Live Nation operates as an event promoter, venue operator, or festival producer.
2 – Ticketing
Represents mostly agency ticket sales earning a service fee, covering all sorts of live events (Ticketmaster fits into this segment).
3 – Advertising
On their websites, in their venues and festivals. Includes venue naming and event branding.
While Live Nation generates most of its revenue from its concerts segment, its operating margin is lowest, so most profit comes from Ticketing and Advertising segments, in that order:
Company Filings formatted by author
Key Geographic Metrics
International events represent a sizeable share of Live Nation’s events and attendance. Over the past 10 year, the growth in North American events and attendees has grown at a comparable pace to those in International markets:
Company Filings formatted by author
Durable Competitive Advantage
1 – Vertical Integration
Live Nation operates in all verticals within the live music industry value chain, cementing itself as the industry leader.
LYV’s role in the value chain (Author)
The ability to earn profits through different streams allows LYV to outbid competing promoters.
2 – Scale
With over 43,600 live events promoted in 2022, LYV can sign more lucrative S&A deals.
Further, significant track record and successful ticketing operations have contributed to operators using Ticketmaster on an exclusive basis.
Equity Research (formatted by author)
3 – Exclusive Operation of Key Venues
Ownership of key venues, artists are more likely to sign for tours with Live Nation as their promoter, guaranteeing access to their venues.
Equity Research (formatted by author)
Best-In-Class Returns on Capital
My calculation method for all results below is taken from Michael Maboussin’s ROIC calculation approach.
Live Nation began operating as a single unit with Ticketmaster in 2010, after its acquisition.
Absolute Floor: Excluding Deferred Revenues
Here, we exclude the short-term deferred revenue liability as a source of funding. We’ll compare ROIC with and without it at the end of this section, but since it should be included as per Maboussin (and any deferred revenue balance >0 increases ROIC) take these ROIC results as an absolute floor:
Calculated and Formatted by author from filings data
At a cumulative ROIC of ~20%, Live Nation generates extremely high returns for its size. More importantly, we see a clear increasing trend.
This increase can be better quantified their incremental returns generated on incremental invested capital. We calculate this from their acquisition of Ticketmaster forward for better representation of their current business operations.
Calculated and formatted from filings data by author
While the 81% incremental return on capital is huge, even taking 2009 as our incremental calculation start date (which includes the capital spent to acquire TM), the incremental ROIC stands at 37%, nearly double the cumulative figure we calculated earlier.
This conveys Live Nation’s ability to monetize its moat and intangible advantages over peers, among other factors.
Why Now?
Multiple Contractions Among Uncertainty
We compare the trajectory of Live Nation’s earnings and multiple to sense investor confidence in the company’s stock.
Pre-2020 Multiple and Earnings (Bloomberg)
Pre-2020, we can see Live Nation’s figures both rising to:
Blended Forward Estimate EBITDA of $1.063B
EV to Blended Forward Estimate EBITDA of ~15.9x
Comparing this to its progression from late 2021 onwards, we see the following shift:
Late-2021 to 2023 Multiple and Earnings (Bloomberg)
As of year-end 2023, the same were:
Blended Forward Estimate EBITDA of $2.010B
EV to Blended Forward Estimate EBITDA of ~11.5x (~28% discount to year-end 2019)
The next two sections will each explore the key factors contributing to investors’ unwillingness to enter at a more attractive-than-ever multiple, and why we believe these cannot justify the deep discount at which Live Nation is currently trading. These factors are:
DOJ Lawsuit Overhang Expected Below-Trend Growth
Drag Factor: DOJ Lawsuit Overhang
Reading equity research or earnings call transcripts, legal topics are dominating LYV investors’ worries. This is clearly visible when those instances are quantified through time:
Bloomberg (formatted by author)
The recent spike in regulatory concerns can be traced back to November 2022 reports of the DOJ investigating Ticketmaster first emerged.
This topic was brought back to the center stage in July 2023 as a Politico article alleged the DOJ would bring forward a complaint against Live Nation by the end of the year.
New reports since indicate that while the investigation is still underway, a case would only be filed potentially later this year.
The worst case envisioned by investors is that the DOJ will present and succeed in obtaining a breakup of Ticketmaster from Live Nation, which will especially harm Ticketmaster’s profitability as a standalone business.
We will go over in details why we do not believe this outcome is unlikely.
DOJ Lawsuit Risks Overblown
Since the DOJ does not comment on ongoing investigations, there is a lot of speculation and unknowns, which, while creating uncertainty, does create opportunity through investors’ emotions (notably fear).
One datapoint we have is President and CFO Joe Berchtold, who believes that Live Nation’s “[…] fundamental business model is not really being questioned” but rather that specific business practices are.
These business practices potentially under investigation and in the news could involve Live Nation’s (sometimes long) exclusive venue ticketing contracts, or Ticketmaster’s involvement in the secondary digital ticketing market.
DOJ Previously Unsuccessful Arguing Against Exclusive Contracts
During the 1990s, the DOJ investigated Ticketmaster’s practice of having exclusive contracts with venues. This concluded without settlement or lawsuit as the LA Times reported that the strength of a potential case would be limited by the fact that the “venue owners and promoters willingly signed the exclusivity contracts.”
More recently in 2004, the DOJ pursued a similar case against Tickets.com. While it did bring this one to trial, the Federal Court judge ruled in favor of Live Nation’s peer, stating as his reasoning that “evidence points very strongly to the conclusion that venues themselves prefer long term exclusive contracts for their own reasons, that they have the economic power to resist long term contracts if it were in their interests to do so.”
Therefore, we see low likelihood that a lawsuit would be brought forward as the DOJ has been burnt before.
Live Nation Consent Decree Details
As part of its 2010 merger with Ticketmaster, Live Nation signed a 10-year consent decree which, among other provisions, set clear guidelines preventing it from coercing venues to use Ticketmaster by threatening to otherwise send artists touring to another location.
The first reported instance of the DOJ looking into potential violations of this consent decree came in 2018, as the New York Times alleged that Live Nation had done just that.
It turned out that the DOJ was halfway through its investigation when the New York Times report came out, and two years later, wrapping up the four-year investigation, it sent its complaint whereby it had found 6 instances in which it argued Live Nation had breached the conditions of its consent decree and used its concert promotion might to leverage ticketing negotiations.
These 6 represent less than 1% of ticketing negotiations over the investigated period.
The issue was resolved out of court by settlement without Live Nation admitting any wrongdoing and entering an amended consent decree in 2020 which included additional measures to ensure strict compliance and runs to 2025.
Lower Odds Of Finding Reprehensible Instances
The July 2023 Politico report alleges that the potential lawsuit would not focus on the alleged violations which occurred before 2020, subject to the prior DOJ investigation.
The article stated that it would be hard to relitigate issues that were already settled.
This leaves a period of approximately 3-years, which partly falls during COVID live event disruptions, and during which it was under a stricter consent decree.
Added control measures include internal and external monitors, enhanced employee training, and stoppage of any bundling of ticketing and promotion contracts with venues.
Additionally as mentioned earlier, management’s impression is that this time around, the focus is on specific business practices rather than their Ticketmaster/promotion integrated business model.
DOJ Litigating an Approved Merger Would Be A First
Now instead if we don’t believe in the above and the DOJ:
Focuses on Vertical and competitiveness (not what management believes)
Finds cases in the shorter 2021-2023 period (despite stricter controls)
Litigates its case instead of settling like in 2019 (would assumedly need stronger arguments)
For this to occur, we believe the DOJ’s case would have to be extremely strong to warrant a breakup, and much more so than in 2018.
The DOJ has never attempted to break up a merger approved with consent decree.
The nail in the coffin, in my opinion, is that at the time of the merger approval’s conclusion, the DOJ stated that “artists would have the ability and incentive to prevent the merged firm from exercising market power in concert promotion”.
Therefore, the DOJ would have to fight an uphill battle in reversing its prior position, against its initial view on the vertical anti-competitiveness threat, with less time to find wrongdoing than when it deposed its last complaint in 2019.
We therefore believe that the DOJ will not settle a case and instead seek a judgement.
Social Pressure Will Not Build A Case
Ticketmaster is clearly not popular with consumers. It is not a coincidence that the first news of the new DOJ investigation came after the Taylor Swift Ticketing issues in November 2022.
However, the general perception of the anticompetitive issues and what the DOJ can pursue seem to be different.
The anger from fans was focused at the time on technical issues on the site that prevented some fans from getting tickets. However, given the supply/demand mismatch, based on Ticketmaster’s size, we doubt any alternative ticketing service could have handled this volume any better.
However, the DOJ is not investigating why the site underperformed expectations but the issues we went over in the sections above.
Unfortunately for Swifties, a solid case cannot be built on social outcry. Wrongdoing has to be pointed out, and we believe the DOJ will come short of instances, preventing litigation as occurred in 2019. Nonetheless, this public pressure led us to believe the Justice Department will not let off easy.
Multiple Re-Rating Opportunity
LYV is trading at a sizeable discount to past years’ averages as measured by the EV/NTM AOI multiples:
LYV EV/AOI (NTM) (Calculated by author)
As with the charts shown earlier in this article, the market’s pessimism or resistance to entering at a historically discounted valuation betrays some implied expectation of damaging DOJ action, much more than was the case in 2019.
In fact, looking again at the earlier chart showing the company’s multiple through time pre-pandemic, there is hardly is break in the trend comparable to what we are currently seeing in the stock.
Therefore, while a differentiated view could be centered around higher-than-anticipated AOI based on a multitude of factors, we believe the key issue on which to take a position and the one which presents the largest gain opportunity if resolved is a multiple re-rating on positive legal news.
Risks & Mitigants
1 – Economic Downturn
The statistics below show that live entertainment has not only grown in recessionary periods going back to 1990, but more so than other entertainment categories.
Equity Research (formatted by author)
For Live Nation specifically, the secondary market profit pool provides a structural buffer against price compression. Tickets are sold well in advance of recessionary periods, pushing out the timing of potential impacts. For example, 2010 post-GFC (which could be seen as a worst-case recession scenario), attendance shrank 10%, and sponsorship revenue remained flat.
Further. the global nature of Live Nation’s events’ supply and demand further diversifies its earnings from U.S. recession exposure.
2 – Shareholder Concentration
Liberty Media owns ~23% of Live Nation and has two board seats and while Liberty’s association has been positive as far as tax, M&A, and capital allocation expertise, Live Nation has a poison pill provision to prevent Liberty or any other hostile acquirer to increase its ownership above 35% without board approval. This could represent a dilution risk to common shareholders.
Catalysts
1 – Share Buybacks
As the company matures and its free cash flow begins to grow far past reinvestment needs, and with the CEO’s significant personal investment in the company aligning his interests with shareholders, a repurchase program is highly likely in the coming years and would be an extra lever in the realization of the value with currently see in LYV.
2 – Opportunistic Acquisitions
Live Nation’s acquisition of OCESA at the end of FY’21, one of the largest promoters in Latin America, is allowing the company to tap into the South American market.
We don’t view Live Nation as an M&A story, but we recognize that strategic acquisitions in the past have been instrumental in company’s international expansion and will act as a catalyst for higher growth.
3 – DOJ Lawsuit Officially Dropped
While unlikely, any formal statement from a federal office denying an intent to bring forward a case against Live Nation would surely shift momentum in favor of its stock.
More likely would be that with time, lawsuit rumors are proven more and more likely to have been unsubstantiated and Live Nation’s equity gradually returns to more “normal” multiple.
Conclusion
While the market’s pessimism has led many to discount LYV business past historical standards, we believe time will show that these concerns are overdone.
As such, current price levels offer an attractive entry opportunity into a high-return company with highly defensible competitive advantages, and a solid path to continuing on its growth trajectory both domestically and abroad.