The Sound of Music: One Music Giant’s Fall into Bankruptcy

Posted on by Ann Choi

Tomorrowland, Electric Zoo, Sensation, Stereosonic, Nature One. These famous music festival brands as well as the online electronic music store Beatport are just a handful of assets owned by the electronic dance music (“EDM”) giant SFX Entertainment, Inc. (“SFX”). On February 1, 2016, SFX filed for Chapter 11 bankruptcy after reaching an agreement with its junior bondholders to execute a debt-for-equity swap that will wipe $300 million of debt off its balance sheet.1 The same bondholders also agreed to loan SFX up to $115 million to pay off senior creditors and to cover ordinary operational expenses, including payments to vendors and employees and royalties for Beatport streaming services. Robert Sillerman, now former chief executive officer and 40% shareholder, will remain as interim chairman until the company finds a new CEO.

News of bankruptcy comes just weeks after an official filing that exposed SFX’s default on a $3 million payment under a promissory note, accelerating the remaining principal balance of $5.8 million for immediate payment.2 The fact that the lenders jumped only three days after the payment was due to file an official default notice says a lot about how lenders view SFX. With cross-default provisions, SFX was at risk of immediate payment on other loans and bonds as well. So how did an EDM empire once touted as the rival to the likes of Live Nation Entertainment end up here?

The SFX as we know it was formed in 2011 by Sillerman to accomplish lofty goals. Sillerman envisioned an efficient profit-spewing mega powerhouse that holds all local EDM event organizers under its belt and conquers the world of EDM.3 It was not long before he stood with DJ Afrojack to ring the closing bell of Nasdaq on October 9, 2013, taking the company public and raising $260 million.4 Most of the raised funds soon went to buying up EDM festivals in Europe, the US, and Latin America. But acquiring huge festivals quickly and at substantial cost (issuing more than $295 million to finance further acquisitions and handle operating losses) one after another, took a toll on the company and destroyed, instead of unlocked, shareholder value.5 Between ($13 share price date) and the end of August 2015, SFX’s share price fell from $13 a share to 91 cents, a 93% decline.6

Poor management and questionable financial planning were clearly a driving force of SFX’s decline, but Sillerman’s conceit also seems to have played a part. His brash “I know nothing about EDM . . . Not a clue. And I love it” attitude hurt the company from the get-go.7 There was plenty of criticism that called out Sillerman for being too corporate without any care for the music scene itself.8 Ensuing litigation did not help SFX. Disco Donnie Presents’ manager Paolo Moreno and others brought a suit against the company alleging that Sillerman, who knew nothing about EDM and who was only brought in to help organize financing for the business, took the idea for himself instead of pursuing the road of partnership. The case was settled less than two weeks before trial, but the $7 million settlement is now the company’s third largest debt.9 SFX still has another legal battle ahead. In September 2015, a class action lawsuit was bought over alleged false and misleading statements made by Sillerman in his attempt to take the company private.10

SFX’s bankruptcy raises questions about the future of the company, including whether pieces of it will be sold and bought by rivals in the live entertainment business. A similar piecemeal sale of EMI was undertaken in 2011.11 Companies in Chapter 11 reorganization can recover after restructuring, be liquidated, or be sold in larger pieces under Section 363 of the Bankruptcy Code.12 SFX insists that business will continue as normal and that “all scheduled and planned events and festivals will take place without interruption providing SFX’s millions of fans an uninterrupted season of spectacular experiences.”13 Perhaps James Barton, the president of Live Nation Entertainment, will step in and set a new course for SFX in time since he was already reported to be in serious talks about joining SFX.14 Who knows? Even DJ Deadmau5 has put out an offer on Twitter.15 But even if SFX manages to put on all of the events as it claims in its press release, there is a serious question as to whether EDM fans will grace SFX festivals at all after several negative incidents, including the closure of access ways into TomorrowWorld festival grounds for the final day of the festival that left tens of thousands of ticketholders stranded after a torrential rainfall.16 Principal terms of SFX’s Chapter 11 Plan of Reorganization have been struck, and depending on approval by the Bankruptcy Court, we shall see how SFX fares under the plan.

  1. SFX Entertainment, Inc., Current Report (Form 8-K) (Feb. 1, 2016). ↩

  2. SFX Entertainment, Inc., Current Report (Form 8-K) (Jan. 7, 2016). ↩

  3. Kerri Mason, Robert F.X. Sillerman’s Empire State of Mind, Billboard Magazine (Sept. 17, 2012), http://www.billboard.com/biz/articles/news/1083962/robert-fx-sillermans-empire-state-of-mind. ↩

  4. Leslie Picker and Andy Fixmer, SFX Falls as TomorrowWorld Producer Raises $260 Million, Bloomberg BNA (Oct. 9, 2013), http://www.bloomberg.com/news/articles/2013-10-09/sfx-raises-260-million-in-ipo-pricing-shares-at-top-of-range. ↩

  5. Ryan Mac, The Fall Of SFX: From Billion-Dollar Company To Bankruptcy Watch, Forbes (Aug. 24, 2015), http://www.forbes.com/sites/ryanmac/2015/08/24/the-fall-of-an-edm-empire-sfx/#78fb98c6f8c0. ↩

  6. Id. ↩

  7. Mason, supra note 3. ↩

  8. See Ryan Mac, What Went Wrong For Dance Music Giant SFX?, Forbes (Feb. 2, 2016), http://www.forbes.com/sites/ryanmac/2016/02/02/what-went-wrong-for-dance-music-giant-sfx/#6b5d338349ee. ↩

  9. Glenn Peoples, SFX Files For Bankruptcy, Sillerman to Be Replaced as CEO, Billboard (Feb. 1, 2016), http://www.billboard.com/articles/business/6859512/sfx-bankruptcy. ↩

  10. Glenn Peoples, SFX, Sillerman Settle Lawsuit Accusing Sillerman of Stealing Idea Behind Company, Billboard (Jan. 26, 2016), http://www.billboard.com/biz/articles/6858176/sfx-sillerman-settle-lawsuit-accusing-sillerman-of-stealing-idea-behind-company. ↩

  11. Matthew Campbell, Amy Thomson and Andy Fixmer, Citigroup Sells EMI in Parts for $4.1 Billion to Vivendi, Sony, Bloomberg BNA (Nov. 12, 2011), http://www.bloomberg.com/news/articles/2011-11-11/vivendi-said-to-agree-on-purchase-of-emi-recorded-music-for-1-9-billion. ↩

  12. 11 USC § 363 (2010). ↩

  13. SFX Entertainment Enters Into Restructuring Support Agreement; Receives $115 Million Financing, SFX Entertainment (Feb. 1, 2016), http://investor.sfxii.com/press-release/financial/sfx-entertainment-enters-restructuring-support-agreement-receives-115-millio. ↩

  14. Glenn Peoples, Live Nation’s James Barton Is In ‘Serious Talks’ For A Leadership Role At SFX Entertainment, Billboard (Dec. 4, 2015), http://www.billboard.com/articles/business/6785868/live-nation-james-barton-leadership-sfx. ↩

  15. Matthew Meadows, Deadmau5 Offers To Buy Bankrupt SFX & Blasts Robert Sillerman, youredm.com (Feb. 4, 2016), http://www.youredm.com/2016/02/04/deadmau5-offers-buy-bankrupt-sfx-blasts-robert-sillerman/. ↩

  16. Matt Medved, TomorrowWorld Investigations Underway After Weather, Transport Issues Strand Thousands, Billboard (Sept. 27, 2015), http://www.billboard.com/articles/news/dance/6708133/tomorrowworld-2015-limits-day-3-access-after-heavy-rainfall-strands-attendees. ↩

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