Description

With returns on tangible capital in excess of 30%, ebitda margins over 20% and organic top line growth of at least 5%, Ticketmaster (TKTM) is a great investment at just 11x depressed trailing earnings and 8x ebit. The confusing five-way split-up of IAC, a recent sloppily executed debt offering resulting in excessively high interest (10.75%) and the loss of the company’s biggest customer further contribute to uncertainty and tee this up as a classic spin-off opportunity.

TKTM is the world’s largest live entertainment ticketing and marketing company. The company is a primary and secondary ticketing retailer in the US and over 20 international markets and provides a marketing portal for clients to over 58 million registered users on ticketmaster.com and affiliated websites. TKTM serves as an intermediary between the venues/promoters and their customers (event-goers) to provide the technology systems and distribution function while bearing none of the inventory risk. With ticket sales over 141 million and gross transactional volume of $8.3 billion in 2007 the company has, and will continue to benefit from, favorable tailwinds – most notably the conversion of ticket sales from the box office (from which TKTM earns no fee) to internet sales. Continued growth in ticket prices as well as ticket volume will benefit the company as the fee they charge is based on a percentage of the ticket price (ticket prices have grown 6% annually over the last 8 years).

TKTM operates as a near monopoly, with most of the competition coming historically from venues that chose to operate their ticketing function in-house and in the future from the start-up of Live Nation’s ticketing business (more on this later). The ticketing business has very high barriers to entry due to the inherent scale advantages. TKTM converts what might otherwise be a cost center to the venue into a profit center for the venue, a result of the royalty fee (kickback) they pay to the venues. The fixed cost nature of the business allows TKTM to operate the ticketing and distribution function at a much lower cost than individual venues. Ticketing involves large investment in equipment and software; it is very important to have “peaking” capacity to ensure the site can handle the abnormally high traffic customary of first day sales. A robust “seat” management function is also important, ensuring the venue does not sell the same ticket twice (tickets are sold from multiple sources: box office, phone and internet).

TKTM provides to its customers’ both the physical infrastructure (computers, hand scanners, etc.) and the software systems necessary to operate the ticketing function, making it very costly for a customer to switch to a different provider. Historical ticket data (sales, prices, attendance, etc.) is stored and owned by TKTM, providing further disincentives for customers to defect. The company’s top ten customers have been with the company for an average of 17 years and the overall retention rate has been over 95%. These long standing relationships make it hard for new entrants to steal customers. The most significant barrier, however, is experience; TKTM has been in the business for 32 years and has been very successful in its operations.

One of the concerns surrounding TKTM is Live Nation’s announcement in December that they will be terminating their contract with TKTM to start their own in-house and third-party ticketing company with the support of CTS Eventim, a German ticketing company. Discussions with industry experts lead us to believe that CTS has no significant technological advantage over TKTM and Live Nation will not be able to offer high enough royalties to lure third-party clients from TKTM. Live Nation is unlikely to attract customers with large incentives (operating at a loss doesn’t seem like an attractive option for them). Another major drawback for Live Nation is that many of the potential clients for whom they would provide ticketing are competitors in their live entertainment business and would not want Live Nation to have access to sensitive details about their venues and tours.

Several adjustments must be made to the reported earnings to get a sense of the true earnings power of the company. Starting in the beginning of ’09 and continuing into ’10 portions of the Live Nation contract will expire causing TKTM to lose some of its ebitda. However, this should be offset by $35mm of costs cuts outlined at the time of the spin. Management projects ebitda will grow in ’09 over ’08 and ’10 over ’09 despite the loss of Live Nation.

According to the company, 3 factors have contributed to 450bps of recently lower reported margins: lower margin acquisitions which, as converted to TKTM platforms, will converge to TKTM mid 20% ebitda margin, losses in Germany and China, and investment spend (run through the income statement) in the resale ticketing business. (Table below outlines all of these adjustments).

Mid-single digit growth in revenues should translate into low-teens growth in eps (likely higher with international growth opportunities), coupled with low capital requirements to achieve this growth means TKTM should be worth at least 15x normalized earnings resulting in a $30-$40 share price in 1-2 years time. This price is consistent with the Board’s view of expected value for TKTM based on prices set for management option grants. According to the S-1, the CEO will receive three grants of options based on equity values of $33, $42 and $51 per share.

Historical Results:

Other Opportunities:

One opportunity that TKTM has only recently started to target is the secondary ticketing market – currently dominated by StubHub (acquired by eBay). With the recent acquisition of TicketsNow, TKTM has become the second largest ticket reseller behind StubHub, and is focused on growing their presence in this market. TKTM should have an advantage over competitors like StubHub because of the relationships they have with the venues and their ability to provide tickets electronically thereby eliminating the risk of fraud and increasing convenience (e.g. buying a secondary ticket 2 hours before an event). TKTM has agreed to pay a royalty to venues in a secondary transaction and, in exchange, some of the venues have agreed to make TKTM the exclusive secondary ticket retailer.

Another area of opportunity that TKTM has been actively pursuing is the international ticketing market. Over the last several years they have greatly increased their presence and revenue in international markets. The strategy, which I am not too fond of, has been to grow through acquisitions – acquiring leading companies and integrating them onto the TKTM platform. The strategy has resulted in some margin compression as the companies are typically breakeven or money losing when they are initially acquired. While serial acquisitions can be concerning – I feel comfortable that individual acquisitions will be relatively small.

Catalyst