Apr
25

Can a Ticketmaster Merger Really Work?

Posted by stockexpert

What happens when you combine the world’s largest concert promoter with the world’s biggest ticket seller? In this economy, you end up with a small-cap that just so happens to control a huge chunk of the live concert industry.

In February 2009, Ticketmaster (NASDAQ: TKTM) and Live Nation (NYSE: LYV) announced their intent to merge operations and create the biggest live event company in the U.S. And you read the small-cap part correctly – at current prices, the combined company would be worth just a tad over $630 million.

The fact that the combined company will fall into small-cap territory is a significant one – had the merger taken place toward the end of 2008, the companies’ combined worth would have been almost $3 billion.

So, should penny stock prognosticators be taking a stake in either of these companies this year?

The Merger Mentality

Both companies point to current economic conditions as a primary factor in deciding to join forces. It’s clear why – in the latest quarter alone, the companies lost a combined $1.4 billion.

According to a New York Times article, “By merging, the companies said they would be better positioned to market their artists and fill stadiums, and save about $40 million a year in operating costs.”

That savings may be a lot for most small-caps, but for these guys $40 million doesn’t even put a dent in the losses.

And hemorrhaging cash isn’t the only reason why this merger might encounter a roadblock: “Bruce Springsteen, who denounced Ticketmaster for referring potential buyers of his concert tickets to a higher-priced reseller it owned, has criticized the possible merger on his Web site,” continues the article.

But criticism from “The Boss” is only the tip of the iceberg. Lawmakers in Washington have been watching the businesses closely as well, concerned over the anti-trust implications of combining these two powerful firms.

“This merger would give a giant, new entity unrivaled power over concertgoers and the prices they pay to see their favorite artists and bands. It must be viewed skeptically and scrutinized with a fine-toothed comb by the Justice Department and the Federal Trade Commission,” said Senator Chuck Schumer in an email statement to the Times’ reporter.

And earnings concerns aside, the deal poses big issues for the companies’ balance sheets. TKTM and LVY have a combined $1.7 billion in long-term debt, a number that’s been slowly creeping up over the last several quarters. If these companies can’t manage to turn things around, there’s no question that their current cycle of losses and debt are unsustainable.

Investors agree… in the last year, they’ve pushed the value of these companies down by 74%.

But What If…

One of the biggest challenges to the Ticketmaster-Live Nation merger is the scope of the two companies. Being in the number-one spot makes TKTM and LYV look like bullies ready and willing to shove around customers, artists, and competitors.

In the past, both companies have taken flack from customers for trying to nickel and dime them. That’s an image that they need to change.

To be fair, there is a lot of potential for this merger – and these companies – to work. Being top dog has given TKTM and LYV a huge competitive advantage, including exclusive contracts with top artists, brand recognition, and the best technology. The bottom line is profitability – if it doesn’t come in the next year or two, these guys are going to be facing big problems.