On Saturday, November 2, the 25 day underwriter quiet period following the October 8 IPO of SFX Entertainment (NASDAQ:SFXE) will expire, allowing the IPO's underwriters to release research reports on the firm into the market and likely granting a near-term boost to the struggling stock's price.
The underwriters, including UBS Investment Bank, Jefferies & Co., Deutsche Bank, Stifel, and BTIG, will attempt to address SFXE's flagging share price with positive research reports. The company had a strong opening at the upper end of its expected price range at $13.00 but the stock has steadily declined to its current position well below the lower end of the original range of $11. The underwriters also made the greedy Facebook (NASDAQ:FB) mistake of upsizing the deal by selling 20% more than the 16.7 million shares originally planned. The stock closed at $9.32 on October 25.
See also seekingalpha.com/article/1732192-sfx-ent...-you
Our past two years of research have indicated a positive relationship between the quantity and reputation of underwriters and an increase in stock price at the end of the quiet period; recent academic studies also have noted this pattern. The positive shift in share price can be expected a few days ahead of the publishing of underwriter research reports as forward-thinking investors buy up shares in anticipation of positive reports.
SFXE's quiet period expiration should be viewed as a short opportunity at best; the firm doesn't look to be a desirable long-term addition for any portfolio. SFXE's soaring revenues over the past few years have not translated to profitability, and the firm hasn't demonstrated a viable path to profitability.
SFXE has made aggressive acquisitions in recent months, but none of them have the income-generating power to make much of a dent in the firm's losses. Despite posting a net loss of $67.3 million for calendar 2012, the firm compensated its top executives at a ludicrously high rate; in 2012, CEO Robert F.X. Sillerman's total compensation exceeded $15 million; Vice Chairman Mitchell Slater received a total compensation of $3.7 million; and Vice Chairman Sheldon Finkel received a total compensation of $7.7 million.
SFXE is an organizer and producer of electronic music culture events, the largest of its kind in the world. The firm is seeking to capitalize on the growing popularity of electronic music events in the United States; between 2007 and 2012, the five largest US events increased attendance 41% per year. Efforts to bring European EMC events such as Tomorrowland to the US will likely represent a significant source of new attendance and revenue for EMC producers.
As a music-oriented firm, SFXE is extremely vulnerable to shifts in public cultural taste. In the even of declining interest in electronic music, SFXE will inevitably head downhill. The firm faces stiff competition from the likes of Rhapsody, Apple iTunes (NASDAQ:AAPL), Spotify, Pandora (NYSE:P), Amazon (NASDAQ:AMZN), and other on-demand music services; its empire of events offer it no muscle to handle these competitors.
SFXE's top-tier management certainly is overcompensated, but it does not lack for experience. CEO Robert F.X. Sillerman has served as CEO since the firm's inception; he has also served as CEO for entertainment firms including Circle Entertainment Inc, Viggle, Inc, and CKX Inc.
Disclosure: I am long SFXE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.