Discounting The King

Robert F.X. Sillerman recently reunited his financial Dream Team of Bear Stearns and Lehman Brothers – the same one that helped put together financial deals for SFX Entertainment back in the day – to underwrite a stock offering for Sillerman’s latest venture, CKX Entertainment. But this time, the results aren’t quite as impressive.

The initial stock offering raised $200 million, selling 20 million shares at $11 per, on June 22nd. That’s a 55 percent discount from the company’s original plan, announced in April, to sell 13 million shares at $24 to raise $300 million, according to Forbes.

Subsequently, CKX announced the exercise of the underwriters’ over-allotment option that permitted the issuance of an additional 3 million shares, also at $11 each.

After underwriting discounts and commissions, the over-allotment option generated about $31 million in additional proceeds from the sale.

CKX most notably bought the rights to the “American Idol” franchise and most of the rights to the Elvis Presley empire when Sillerman formed it from a shell company.

Granted, $231 million is nothing to sneeze at. But where are those proceeds going?

What makes this deal different from those that financed SFX is that Bear Stearns was already owed $150 million in loans to CKX that needed repayment; another $35 million was used to pay a portion of the purchase price for the “American Idol” properties. That left about $46 million for CKX to actually use toward future acquisitions.

Even the reunion of Sillerman, Bear Stearns and Lehman Brothers wasn’t as simple as it seemed.

The National Association of Securities Dealers requires a “qualified independent” bank acting as co-underwriter if one underwriter stands to receive more than 10 percent of a deal; in this case, Bear Stearns’ take was 65 percent. That’s where Lehman Brothers came in.

Lehman is no stranger to Sillerman, having advised the rollup mogul on his $4.4 billion sale of SFX to Clear Channel Communications.

“This offering appears to be nothing more than a sweetheart deal for Bear Stearns,” Jacob Zamansky, a lawyer who represents individual investors, told Forbes. “One hopes their brokers disclosed the various conflicts and financial data rather than just hype the Elvis and ‘American Idol’ assets.”

That’s not to mention that an unnamed Bear Stearns senior managing director owns 500,000 shares of CKX, according to the magazine. Another unnamed senior partner of entertainment law firm Greenberg Traurig, which also advised on the offering, owns 375,000 shares.

“Even at the $11 deal price, the company’s market capitalization is $920 million, over three times what CKX paid just three months ago for the Elvis and ‘American Idol’ assets,” Forbes said. “Buyers of the deal put up 67 percent of the price paid by all purchasers of the company, yet only own 23 percent of CKX stock post-offering. (Sillerman still owns 37 percent of the company.)

“The company has a negative tangible book value and its pro forma financials show it earned only $1 million in 2004.”

The picture painted by the combination of events around the CKX offering seems to be one of questionable long-term viability of the Elvis and “Idol” properties in the eyes of investors as well as a healthy skepticism by potential investors less interested in the hype than the actual value of an acquisition.

Sillerman isn’t alone in finding it more difficult to raise money in the public markets. Billionaire Edgar Bronfman Jr. recently suffered a flop with his Warner Music Group IPO. And one security lawyer told Forbes that investors are simply more discerning than they used to be.

“Back in the ’90s, no one noticed or cared about the fine print in these offerings,” Deutsch & Lipners’ Seth Lipner said. “Today, many investors are taking a harder look at these lousy deals and deciding to stay away.”