Warner Music Group is waiting to go public, will Madison Square Garden Entertainment hold its entertainment spinoff?
Stock market volatility sparked by fears over the novel coronavirus has caused music companies to pause their plans on Wall Street. Warner Music Group has postponed — or is not rushing to — its planned initial public stock offering, while Madison Square Garden Entertainment faces uncertainty for the spinoff of its entertainment division from its sports division.
Over a harrowing two weeks filled with news of increasing cases of COVID-19 infections and deaths around the globe, the S&P 500 dropped as much as 11.5% and closed Friday (March 6) down 10.9%. The tech-heavy Nasdaq, home of Apple and Amazon, closed Friday off 10.5%. It’s a dangerous environment to woo investors more worried about a potential pandemic’s economic consequences.
“Typically when volatility spikes, the first casualty is the IPO market,” said Josef Schuster, founder of POX, a manger of the underlying strategy index for stock market funds focused on IPOs and spinoffs. Only one company went through with an IPO in the last two weeks, GFL Environmental Inc, a Canadian waste management company. GFL set the IPO below its original target and raised $1.4 billion, although the share price ended the day down 12%.
Now there are 70 companies behind the IPO bottleneck and two companies canceled planned IPOs this week, according to Marketwatch. Heavily anticipated IPOs by tech companies such as Airbnb, CloudFlare, and food delivery services Postmates, DoorDash and InstaCart are in doubt. It’s an undesirable but practical decision — companies get only once chance to make a first impression. A company a better valuation and larger capital raise than jittery investors after the markets calm. Waiting until the proper time can mean an extra dollar or two per share on a sale of tens of thousands of shares.
Warner Music Group isn’t having its IPO during the upheavel, but Schuster notes the music company is a different breed than many others planning to go public and that might be reflected in demand for shares. “Warner is kind of a re-IPO, not the most exciting deal around,” he says. “It’s been public before. It’s more like a private equity deal” where the firms behind a leveraged buy-out use an IPO to cash out of their investment.
Warner’s IPO might lack the appeal of a high-growth tech company, but 10% annual growth — both for Warner and the global market — should grab investors’ attention. (Warner’s revenue in calendar year 2019 rose 10% to $5.73 billion with net income of $376 million.) Meanwhile, young, disruptive companies like DoorDash, Instacart and Postmates are bleeding money while battling for share of a nascent but potentially huge market for in-home food delivery.
After the record business’ tumultuous ride the past decade, a music company owner can’t be blamed for locking in profits when business is at a high. And up until a week and a half ago, the timing seemed right: a roaring stock market and a growing record business has rekindled investors’ interest in record labels. Universal Music Group is seizing the moment and selling a 10% stake to Chinese tech giant Tencent Holdings for $11 billion at a $33 billion valuation. (Parent company Vivendi is planning for an IPO for Universal Music Group in 2023.) Likewise, Warner’s owner, Access Industries, and other shareholders eyed an opportunity to cash out after global music’s rebound from record-low revenues in 2015.
Billboard estimates Warner is worth $15 billion to $16 billion, up to 365% above the $3.3 billion Access Industries paid in 2011.
Hipgnosis Songs Fund Limited, a British publishing company listed on the London Stock Exchange, has not changed its consideration of another equity offering, a company spokesperson told Billboard. Hipgnosis has raised about $800 million since its IPO in July 2018 and quickly acquired catalogs of songwriter and producer Jack Antonoff; Dave Stewart of The Eurythmics; producers Timbaland, The Dream and The Chainsmokers; Snow Patrol keyboardist Johnny McDaid, and many more. If the market recovers, a publishing company with predictable returns from a growing industry should have no problem raising more money.
Market turbulence also affects a spinoff, where one company splits into two distinct companies in an all-stock, non-cash transaction. The spinoff company might worry that shareholders will immediately sell their new shares and cause the price to drop, according to Schuster. Madison Square Garden Entertainment plans to complete a spinoff of its entertainment businesses from the sports division by the end of March, creating a pure-play sports company and a concerts and live events company. Apparently the timeline remains intact: In a press release Friday MSG said it “is continuing to make important progress” on the spinoff but didn’t indicate a date change.
Fortunately for Warner, its revenue depends little on music fans’ willingness to gather in public. Recorded music sales are decreasingly dependent on brick-and-mortar sales of CDs and LPs. Instead, royalties come from subscription and ad-supported streaming. In contrast, Live Nation, a business built on providing music fans out-of-home experiences, has lost $4.6 billion of its market capitalization on a 29.6% decline in its share price.
Out-of-home companies’ stocks have been battered — even with Wednesday’s respite — by worries consumers will stop traveling and limit their time in public. From Feb. 21, the beginning of the COVID-19-related downturn, to Friday’s close, MSG’s share price dropped 20.7%.
Companies that depend on travel and leisure have fared worse. Carnival, Royal Caribbean and Norwegian cruise companies are down an average of 38.6% from Feb. 21 and, because of their early COVID-19 issues, 50.5% year to date. Hotel companies Hyatt, Marriott and Hilton have dropped an average of 22.0%. Airline companies American, Delta and United and Southwest are down an average 28.9%.
How long will the IPO and spinoff window remain closed? The markets didn’t improve when the Federal Reserve cut interest rates by half a percentage point, or when strong employment numbers were announced. There has been chatter that Airbnb may postpone its IPO until 2021. Then on Friday came news J. Crew is considering alternatives to the IPO of its Madewell brand. Until the IPO window opens, IPO hopefuls are humming an early Tom Petty hit: “The waiting is the hardest part.”