Over the past year, in an effort to establish exclusive, long term multiple-rights partnerships (so called “360” deals) with select A-list artists, Live Nation has dangled generous advance payments and equity as bait. Some of music’s biggest names bit in to the lure. Madonna, and Jay-Z, Shakira, Nickelback and U2 all signed up. Now, it seems a couple of the deals may have been even more generous than Live Nation intended. SEC filings indicate U2 will be the first to cash in.
U2’s next studio album, “No Line on the Horizon,” is officially slated for a March 2nd release. The band’s promotional and touring partnership with Live Nation won’t really pick up steam until then. Still, before the revenue starts running, nearly $25mllion is going U2’s way now.
When U2 signed their “touring agreement” with Live Nation on October 1st, one of the compensation elements included equity in the form of 1,556,386 shares of unregistered Live Nation stock issued to a band management entity called Evergreen Concepts, LLC. On the day of the agreement, these shares were worth between $24.8m and $25.6m depending on whether they were priced at the October 1st closing price or a 30 day average.
Pursuant to securities laws, as exempted but unregistered shares, the stock was restricted and could not be freely sold on the open market. It was intended to give U2 and live Nation a mutually beneficial incentive for working toward Live Nation’s future success.
On the flip side, to insure U2 wasn’t penalized for a weak performance by the company, Live Nation gave U2 the right to demand the stock be repurchased under “certain circumstances.” Specifically, according to a 8-K filing in October, the agreement provided that “the initial holders of the Shares may under certain circumstances require the company to repurchase the shares at the original issuance price prior to October 31, 2010.”
Exactly what constituted “certain circumstances” wasn’t publicly disclosed (8K filings are required for the sale of unregistered equity or material agreements outside the normal course of business. There was no requirement to disclose the “Touring Agreement” terms) .
There are many possible triggers but the stock price dipping below a fixed minimum value seems most likely. Live Nation’s stock has been on a steady decline since earnings were announced in early November.
Whatever the cause, the repurchase right gave the band the ability to demand repayment at the original October 1st valuation –about $25m, despite the fact that the shares’ market value is more like $6m today.
Live Nation is obligated to pay the $19m difference (plus a 2% fee to Goldman Sachs for the sale of the 1.5m shares and another estimated $50k in expenses).
With the stock beaten up? Why demand the sale now? Why did U2 force a sale into a down market when they were guaranteed to have drawn the same $25m at any time through 2010?
It’s hard to believe one of the most successful bands of all time was desperate for the money. And U2’s manager Paul McGuiness told the WSJ that the band is “very much in business with [Live Nation]” and planning to tour in 2009. So sticking it to Live Nation for $19m wasn’t a vote of no (or low) confidence.
Maybe 2008 tax planning? Band members accountants suggesting the tax hit would be lower this year in 2008 then in 2009 when they plan to release a new album and tour? Maybe, the triggering event was on a timer? They had to exercise the right within 30 days of it being triggered or else it would lapse? Maybe?
For Live Nation it’s an unfortunate $19m to $20m expense.
The good news is – of the four other prominent 360 deals signed – Madonna, Shakira, Jay Z, and Nickelback only one more has a similar provision. The bad news is, it’s the biggest one of them all: Madonna received 1,174,371 shares of stock In October 2007.
That value of Madonna’s stock grant, like the U2 deal, was apparently “insured” at $25m, the then market value. It’s reported, she will have the chance to cash out in April. Should she choose to exercise those rights, and if the stock price remains at current levels, the out of pocket, cash costs Live Nation will incur to repurchase the stock could be a couple million more than they’re paying U2.
Beyond that – searching of Live Nation’s SEC filings turned up no documents or disclosures showing new equity set aside for or issued to Shakira or Nickelback. Jay Z received warrants for 500,000 shares at an exercise price of $13.73.
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