SPAC
Slacker, the music streaming service owned by LiveOne, called off its planned merger with Roth CH Acquisition V Co., a special purpose acquisition company, the companies announced Monday (Oct. 30).
LiveOne CEO Robert Ellin attributed the move to a poor market climate for small companies. “Market conditions for micro-cap stocks, for stocks under $1 billion, are just decimated this year as a whole,” he says. Companies that go public through SPAC mergers also face a difficult time, he adds. A SPAC is a blank-check company created and funded for taking a private company public. SPAC funding and mergers peaked in 2021, according to SPAC Research.
The SPAC market has softened considerably since 2021. Many SPACs failed to close a deal and returned their funds to shareholders. Music Acquisition Corp. returned funds to shareholders in Dec. 2022. Liberty Media closed down its SPAC in Nov. 2022 after a fruitless search for a takeover target. A record 123 SPACs liquidated in the first half of 2023, compared to just seven in the prior-year period, and the average redemption rate — SPAC shares redeemed for full value before merging with a target company — increased in the first half of 2023, according to Kroll. “It’s a tough market to come out in,” says Ellin.
Additionally, LiveOne believes Slacker has gained in value since it agreed to merge with Roth. LiveOne previously announced it had signed a letter of intent to merge Slacker with Roth and put a pre-money valuation of $160 million on the music streamer. But on Monday, LiveOne raised its revenue guidance for Slacker to the range of $63 million to $66 million for the fiscal year ended March 31, 2024. The company expects adjusted earnings before interest, taxes, depreciation and amortization of $17 million to $19 million.
“I think it’s worth $200 million at a minimum,” says Ellin, “and probably way higher than that when you’re looking at what Tidal sold for at $400 million and change, where Deezer trades at 300 million [euros, or $317 million]. We’re the only one that’s profitable. We make money every month, every quarter, every year.”
The market currently puts a far lower value on Slacker, however. LiveOne — including Slacker — has a $92 million market capitalization. That includes an 81% stake in PodcastOne, a podcast company LiveOne spun off in September that currently has a market capitalization of $70 million. LiveOne said that prior to the spin-off, PodcastOne was valued at between $230 million and $274 million by third-party valuation firm ValueScope.
Slacker was founded in 2007 and acquired by LiveOne — then called LiveXLive Media — in 2017 for $50 million. Many of its subscribers come from a white-label service that powers other brands’ digital radio. For example, nearly every new Tesla automobile sold in the United States comes with a subscription to Tesla Radio that’s provided by Slacker and paid for by the automaker. LiveOne says it added over 300,000 new paid Tesla subscribers in the first five months of its fiscal year, a 30% year-over-year increase. The company expects to add over 800,000 new subscribers this fiscal year.
With the SPAC merger off the table, Ellin sees numerous potential avenues for Slacker. “There’s an opportunity today to roll up multiple other companies in the space,” he said during an investor call on Wednesday (Nov. 1). “We have four to five potential acquisitions in the audio business alone that would fit in very nicely with the company and be extraordinarily accretive to revenues and bottom line. We also could explore a sale or a strategic investor, including some of our current customers or investors. We also will explore a direct IPO as the markets change and fair market value for the numbers that we’ve delivered are available.”
Roth “is currently exploring opportunities with other potential merger candidates in order to complete its business combination,” according to Monday’s press release.
Streaming service Slacker is looking to become the fifth music company to go public by merging with a special purpose acquisition corporation, or SPAC — and the clock is ticking. Its owner, LiveOne, has signed a letter of intent to combine Slacker, which it estimates will have a valuation of $160 million, with Roth CH Acquisition V Co.
But like many other SPAC deals, Slacker’s merger with Roth has faced challenges. For starters, many of Roth’s shareholders have opted not to take part in the Slacker deal. Roth experienced $93 million in redemptions in the second quarter, according to its latest 10-Q filing, as shareholders opted for a $10 redemption value rather than roll the dice on a music streaming company that expects to finish 2023 with 3.75 million free and paying users. That leaves Roth with $26.4 million to contribute to Slacker once the deal is done.
To shore up support ahead of a merger, Roth entered into non-redemption agreements with shareholders representing 2 million shares. Those shareholders agreed not to redeem public shares and will receive a payment of 4 cents per share per one-month extension, according to a Roth filing with the SEC.
Starting a SPAC gives the founders a limited window to put investors’ money to good use or return the funds to shareholders. Running out of time to close a deal with Slacker, in May, Roth received shareholder approval to extend the merger deadline by up to six months. The extension ends Dec. 4 — barely more than three months away. “It seems [like a] very tight [timeline],” says Megan Penick, an attorney at Michelman & Robinson. “I mean, conceivably they could still complete it. It just seems that they must still be conducting their due diligence and coming to terms on how the deal is going to be structured.”
A SPAC effectively puts the cart before the horse: It raises money through an initial public offering (IPO) before setting about finding an appropriately sized, high-growth company to take public. (Pursuing a target before the IPO, as Digital World Acquisition Corp. did with Donald Trump’s Truth Social, is against the rules.) The target company is spared the long and costly process typically incurred when taking a company public. The SPAC founders get a stake in the post-merger company and investors benefit when the post-merger stock rises above the redemption price. The number of SPAC IPOs jumped from 55 in 2019 to 610 in 2021, according to S&P Global Market Intelligence, while money raised increased from $14 billion in 2019 to $160.8 billion in 2021.
Overall, however, SPACs have failed to live up to their lofty expectations. “Too many SPACs, not enough suitable targets,” says Penick. After 265 SPACs closed mergers in 2021, only 187 did so in 2022. And while there were 100 SPAC deals in the first half of 2023, the value of the deals amounted to just one-tenth of the deals closed in the first half of 2021, according to S&P Global.
Faced with a shortage of good candidates, many SPACs have opted to dissolve and return capital to shareholders. Music Acquisition Corporation, co-founded by former Geffen Records president Neil Jacobson, dissolved in 2022 after raising $230 million in a 2021 IPO. Liberty Media did the same with its SPAC, Liberty Media Acquisition Corp., in November, more than two months before the deadline to complete a deal or return to shareholders the $575 million it raised in an IPO. “Frankly, getting an extension wasn’t worth it, given we had nothing on the table that was attractive enough for us to take [a] look,” said Liberty Media president and CEO Greg Maffei.
Perhaps the biggest problem with SPACs is they haven’t been a good investment for the original investors. Abu Dhabi-based music streamer Anghami has fallen 91% to 89 cents since merging with Vista Media Acquisition Corp. in February 2022. French music streamer Deezer has fallen 76% to 2.06 euros since merging with IPO2 in July 2022. And New York-based publisher and label Reservoir Media has fallen 43% to $5.45 since merging with Roth CH Acquisition II — the same team behind the SPAC that intends to merge with Slacker — in July 2021. All three stocks had a $10/10 euro IPO price.
Worse yet, Alliance Entertainment ended up trading over the counter in February after a high number of redemptions left its partner SPAC, Adara Acquisition Corp, with just $1.7 million to contribute to the merged company — probably not enough to cover investment banking and legal fees for the transaction. That also left Alliance short of the New York Stock Exchange’s float requirements. “The issue of having enough market volume and enough market cap to remain a listed security is a challenge that a lot of SPACs run into,” says Michael Poster, an attorney at Michelman & Robinson. Alliance has dropped 75% to $2.02 since it merged with Adara in February.
Slacker didn’t respond to a request for comment on the deal.
Alliance Entertainment’s plan to go public through a reverse merger with Adara Acquisition Corp. — a special-purpose acquisition company (SPAC) — got sideswiped by the collapse of the SPAC market.
While the deal was finalized Monday (Feb. 13) and Alliance Entertainment is now a publicly traded company, it leaves the media wholesaler without the initial intended benefit of reaping tens of millions of dollars in new funding to continue making acquisitions to fuel growth and to modernize its warehouse equipment.
That’s because only Adara shareholders owning 167,00 shares (out of 10 million total) have chosen to participate as stockholders in the merged entity. As a result, Alliance Entertainment only received about $1.67 million, which likely isn’t enough to cover the legal and investment banking fees for the transaction.
Alliance Entertainment Holding
The company’s light stock float also leaves it ineligible to be listed by the New York Stock Exchange as originally planned, so now Alliance is being carried on the OTC pink-sheet marketplace.
Alliance Entertainment — which carried a $480 million valuation going into the deal — remains a formidable powerhouse as a one-stop rack jobber and independent distributor and overall entertainment software wholesaler, however. While the company brought in $28.62 million in net income on revenue of $1.42 billion for its fiscal year ended June 30, 2022, it lost $8.34 million on sales of $238.7 million for the three-month period spanning from July to September.
Alliance Entertainment announced its plans to go public via a SPAC reverse merger in June 2022. At that point, investor excitement over the SPAC route to public listings had already cooled from its high in 2021, but by the end of the year, it had totally tanked. And even if Alliance Entertainment didn’t raise as much money as it had hoped by going public, there are other benefits. As a publicly traded company with audited financial statements that need to surpass the scrutiny of the Securities and Exchange Commission, it should now be able access capital and options to raise funding through debt beyond its previous reliance on bank loans.
“We believe that today’s milestone combined with our strong revenue growth, expanding customer base and product offering, and several successful acquisitions, will help accelerate our future expansion initiatives,” said Alliance Entertainment CEO Jeff Walker in a statement. “Alliance Entertainment today is well positioned to continue to capitalize on shifts towards eCommerce and Omni-Channel strategies, especially with retailers and manufacturers’ vastly increased reliance on their DTC (Direct to Consumer) fulfillment and distribution partners. We are at an inflection point that now positions us to execute a multi-prong growth strategy that we expect will deliver a double-digit revenue growth rate with strong cash generation to the bottom line.”
Alliance Entertainment serves as a physical music, movies and video games wholesaler to retailers including Amazon, Best Buy, Target, Kohls and Gamestop, as well as independent stores; it’s also a rack jobber to chains like Walmart and Barnes and Noble. It additionally provides e-commerce fulfillment to many of those retailers and runs its own online websites including Deepdiscount.com, Popmarket.com, Importcds.com, Critic’s Choice Video, Collectors Choice Music and Movies Unlimited, while fielding its own brands on eBay, Amazon Marketplace and Discogs as well. In total, nearly $540 million, or 38% of Alliance’s revenue, is generated through the above online sales.
In total, Alliance says it stocks over 485,000 unique entertainment products from Microsoft, Nintendo, Activision, Electronic Arts, Sega, Funko, Disney, Warner Home Video, Universal Video, Sony Pictures, Fox, Lionsgate, Paramount, Warner Music, Sony Music, Universal Music, Mattel, Lego, Hasbro, Arcade1Up and another roughly 500 entertainment product manufacturers. Within that, the company also fields independent distribution companies like music distributor AMPED, video distributor Solutions and video game distributor Cokem that exclusively carry over 57,000 vinyl, CD, DVD and video games titles combined.
“This business combination [with Adara] will further enable our significant focus on a strategic roll-up strategy of acquiring and integrating competitors and complementary businesses which we believe will drive an accelerated competitive position and value creation,” said Alliance Entertainment chairman Bruce Ogilvie in a statement. Being a publicly traded company will allow for further investment, he added, in automating facilities and upgrading proprietary software, which he said makes management “confident we can grow revenue and expand margins.”
Ogilvie continued, “We will also continue to expand into new consumer product segments, growing our product offering and providing more to our existing customer base while attracting new customers in the process.”
Walker and Ogilvie retain nearly 95% ownership in Alliance Entertainment and their shares are subject to an extended lock-up period.
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