Top 3 SPAC Targets – Music
SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among companies in the music industry. We look at why they are compelling and why each could be a fit for a blank-check merger.
With the rise of streaming, fewer and fewer people are buying individuals songs and albums, but plenty are selling. Bruce Springsteen set a new high mark of the market by reportedly selling his catalogue for $550 million in December. By contrast, Michael Jackson famously bought the entire Beatles catalogue for $47 million in 1985, outbidding Paul McCartney in the process.
There’s been inflation since then, of course, but that’s still only about $127 million in 2022 dollars. In other words, the value of music rights itself is clearly changing. Another change is in the age of musicians looking to cash in upfront on rights rather than let it trickle in over time.
Last month, Justin Timberlake sold his catalogue for about $100 million to Blackstone-backed (NYSE:BX) rights-collector Hipgnosis (LON:SONG). In doing so, he joined other young artists who have also sold rights in Shakira and the Chainsmokers, the latter of whom released their first single just eight years ago. Roth CH II got into that action by closing a combination with Hipgnosis competitor Reservoir (NASDAQ:RSVR) in July 2021.
All of this comes at a time when consumers increasingly no longer want to pay upfront for permanent access to a song or album, but are content to shell out subscription fees to large rights-holders like Spotify (NYSE:SPOT) or Amazon Music (NASDAQ:AMZN) or sit through ads in between. US music subscription revenue has grown from $35.3 million in 2017 to $84 million in 2021. Revenue from ad-supported streaming from these outlets meanwhile grew 47% year-on-year to $1.8 billion in 2021, according to the Recording Industry Association of America.
Even sales of physical media broke a 26-year slide and increased 42% in 2021 as retail stores re-opened from the pandemic. Interestingly, sales of vinyl outpaced CD sales, as consumers apparently have decided that if they want a physical copy they’re going full old school.
Adara (NYSE:ADRA) announced last week it was getting behind that trend with its $480 million combination agreement with physical media wholesaler Alliance Entertainment. That isn’t the only physical portion of the music space seeing growth, however. Ever since people have started to listen to music everywhere, the quality of headphones has become a status symbol and the global market for such devices is expected to grow at a CAGR of 20.7% through 2027.
While not every artist can sell their catalogue for millions, UnitedMasters gives independents a chance to get some upfront payment for the tangled revenue streams musicians now draw from.
The New York-based company is set up to provide up-and-coming artists a single platform to manage their distribution across the aforementioned streaming platforms as well as Apple Music (NASDAQ:AAPL), TikTok, Instagram (NASDAQ:META), YouTube (NASDAQ:GOOGL), and HiFi streamer Tidal (NYSE:SQ).
This UnitedMasters platform also performs some agency duties in getting songs placed in films, TV shows and video games. And, it becomes a two-way marketplace, as UnitedMasters processes and centralizes musicians’ income streams and also allows them to split payments to collaborators and re-direct those earnings towards marketing on social.
On the more granular level, it allows individual musicians to sell beat tracks and other musical samples to be incorporated into new works and receive ongoing royalties from them. For artists that pay UnitedMasters a $59.99 per year subscription fee or producers selling samples and paying $19.99 per month, both are offered to receive 100% of their royalties serviced through the platform. For those that choose the UnitedMasters’ free option, they still receive 90% of royalties but with some limitations on uploaded content.
To make all of this work, including upfront payment on streams, UnitedMasters has raised $170 million in venture funding since 2017 including two $50 million funding rounds in 2021, with the latter raising its valuation to $550 million in October, according to Pitchbook. But VC deal flow fell 23% in the second quarter of 2022, according to CBInsights, so United Masters may have to look elsewhere for financing if it wants to maintain its heading.
On the listening side of the music market, Skullcandy was ahead of its time and showed how being too far ahead can go bad. It IPO’d in 2011 at a $535 million valuation, but was later taken private again by Mill Road Capital for $196 million in 2016.
But now that how you listen is increasingly a lifestyle choice, Skullcandy has a chance to jump back into the market and gain retail investor support in a way that has shown to be important for EV stocks.
A SPAC deal could also accelerate the launch of Grind Fuel, its alternative to Apple’s Airbuds. At $100, it offers hands-free voice commands, 40 hours of battery life and wireless charging while a slightly cheaper $80 alternative brings similar functionality with fewer frills. Apple’s AirPods meanwhile range in price from $179 to $549.
Skullcandy also showed interest in rolling up peers by grabbing up Astro Gaming, Rock My Run and Athletigen in the run-up to its buyout. A SPAC deal could potentially put it back on the warpath with gaming and VR integrations that could further set it apart from competitors.
It could be on the radar of Waverly Capital 1 (NYSE:WAVC), which is chaired by former Warner Music (NASDAQ:WMG) CEO Edgar Bronfman. However, The Music Acquisition Corporation (NYSE:TMAC), which raised $230 million in its February 2021 IPO has yet to pick a dancing partner and could be in play for targets across the space with industry experience from its CEO Neil Jacobson who formerly served as an agent to will.i.am, Robin Thicke and Jeff Bhasker.
On the lifestyle side, major brands are also finding more opportunities than ever to translate a brand presence into ancillary income that can itself become the primary revenue streams for companies. Before being caught in 2022’s downturn, Playboy (NASDAQLPLBY) hit a high of $55.45 following its combination with Mountain Crest, largely based on its ability to leverage its intellectual property in a diverse set of merchandise.
For Los Angeles-based Fender Musical Instruments, which has created iconic guitars for rockers throughout the past century, the world could potentially be its oyster as a public company. It was bought out by Servco Pacific Capital for undisclosed compensation in 2020.
At the time, Fender had been working to transition its business model from a producer and wholesaler to a direct-to-consumer (DTC) ecommerce hub for guitar sales. Although the musical instruments market is expected to have less dramatic growth that its digital peers, it was still worth about $40 billion in 2022 and expected to grow at a CAGR of 8.8% through 2026. Fender has also expanded into app-based guitar lessons and simulators for its effect pedals and amplifiers.
Users can also tune their guitars using a Fender app and so far 55 million lessons have been taken on the platform. Blue Whale I (NASDAQ:BWC) may want to pick up Fender and jam as it is chaired by David Johnson, who has been a lawyer and executive in the music industry for the past 45 years. His last stops were as CEO of Warner Chappell and EMI Music Publishing after serving as general counsel for Sony Music (NYSE:SONY) and Warner.