Description

Note: The following advocates an investment in TKTM standalone, which we like regardless of whether or not the company's proposed merger with Live Nation (LYV) receives regulatory approval. We view merger approval as upside to an already exciting story, as we believe that the combined company and its prospects would be perceived positively by the market. The new entity would essentially control the entire concert promotion/ticketing food-chain, allowing for pricing power and synergies that far exceed those discussed by the companies until now.

Thesis

Ticketmaster is a high-quality, cash flow generative business whose true value is being obscured by M&A newsflow coupled with market misperceptions regarding competitive threats to its core ticketing business. TKTM is the world's largest entertainment ticketing and marketing company, with a near-monopoly hold on the US ticketing market. Once viewed as the crown jewel of IAC (spun out with ~20x multiple), the stock has been depressed by spin trading dynamics and uncertainty surrounding the company's pending merger with Live Nation (and prior to that the loss of LYV as a customer). Trading at less than 6x forward estimates of free cash flow, TKTM's valuation fails to reflect the quality of its business or its long term growth prospects. The company is aggressively innovating to maintain and expand its dominant market position, and has undertaken numerous strategic initiatives that will allow them to thrive with or without LYV as a partner. Given the significant moat surrounding TKTM's business and the attractive secular growth trends underlying the entertainment ticketing industry, its stock should revalue as the company's cash flow generation continues and near-term M&A uncertainty is resolved.

Bull Case

a) High quality business - significant technological moat and high switching costs (overall retention rate of 95%):

• Core system (both hardware/software) is installed at all POS, and is provided at little/no cost to clients (in exchange for ticket sale rights). Technology not simple - specifically, "peaking" capacity to ensure the site can handle the abnormally high traffic customary of first day sales is essential. Most customers locked into long term contracts. LiveNation's initial attempts at self-ticketing have had mixed results at best.
• Vast distribution/marketing network. To maximize ticket sales, artists need to reach the widest possible audience - TKTM has most reach and largest customer database. Company sends out over 12 billion email alerts annually, reaching over 30m customers/week. Scale matters.

b) New growth initiatives should improve margins and stimulate growth:

• dynamic ticketing (pricing determined by individual seat rather than section)
• secondary ticketing (market to grow at 12% CAGR over next five years)
• international (currently underpenetrated).

c) Attractive secular end-market dynamics - TKTM sits at the nexus of music industry's current shift - with advent of piracy/downloadable music, concerts replacing album sales as key profit center for artists. Over last 4 years, album sales have declined by a CAGR of over 7%, while concert sales are up over 10%. Business has proved resilient throughtout the recession, with SSS concert ticket sales down 1-3% over the last 12-18 months.

Bear Case/Risks

a) Competition - loss of LiveNation raises spectre that DIY ticketing may be viable option. Feared that increasingly sophisticated ticketing technology coupled with TKTM's high margins will erode TKTM's dominant market position.

b) Regulatory risk - Primarily driven by dislike of its ticketing fees and market dominance, TKTM has historically been unpopular with both artists and customers. Even prior to the LYV deal, TKTM has been a target for politicians, regulators and activists. While highly unlikely (particularly given increasingly competitive ticketing market), regulatory changes to the company's business model would hurt.

Valuation

Trading at 7x/6.5x our estimates of 2009/2010 free cash flow, TKTM's valuation is not reflective of the company's business quality or growth prospects. As a result of the IAC spin the company is levered (~2.7x EBITDA) but comfortably compliant with its debt covenants. Our estimates of EBITDA are well within the range of projections disclosed by the company in its latest merger documentation, filed early November. Only relevant comp is CTS Eventim (EVD GR), which trades 17x 2010 EPS (but is growing faster than TKTM).

Management - CEO Irving Azoff

Became music's preeminent agent in the 70s, when he represented the Eagles in negotiating a record setting royalty amount ($1.50/record) for Hotel California (which went on to be one of the best-selling albums in history). In 1983, became head of MCA's then-unprofitable music division and turned it around over six years. In 1989, joined Warner Music, which gave him half ownership of Giant Records, a small label which he then grew. He sold his stake back to Warner in 2001, just before CD sales began to decline. In 2005, launched his old management firm, Front Line, and raised over $100m from private equity and strategic partners. He bought 60 smaller management firms over the next two years and proceeded to sell the business to Ticketmaster for $410m just 3 years later. Upside on almost $80m of TKTM stock at current levels.

Catalyst

Resolution of uncertainty surrounding the TKTM/LYV transaction, likely driven by DOJ's approval or rejection of the deal.