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Before the shutdown interrupted all concerts, Live Nation traded as a growth story, showing double-digit revenue and profit growth, which bulls expect to return. However, the numbers show that $LYV grew mostly by acquiring venues rather than by taking value out of its “flywheel.”
$LYV earns 71% of profits from putting on concerts and advertising at them. Profits for these have grown by an impressive-looking 14% per year over the past five years. However, this was nearly all driven by acquiring new venues, with EBITDA per venue only increasing 2% per year.
Profits for $LYV didn’t grow from generating more revenues per attendee, increasing crowds per event, or squeezing more events out of its venues, all of which would imply scale economies. The key growth driver was new venues (12% CAGR), which were added in expensive acquisitions.
$LYV then adds back all costs related to these acquisitions (again, the only real growth driver), incl. “acquisition expenses,” to get to its Adjusted Operating Income. But these are real costs as they’re spending hundreds of millions of dollars per year on acquiring these venues
The last company I remember ignoring its key cost of growth was Valeant. $VRX used M&A to replace R&D and added back the resulting amortization. $LYV acquires venues to grow attendance instead of spending SG&A and adds back all costs. Both dramatically inflate adjusted earnings.
This can be seen in the weak free cash flow, as normally defined (CFO less capex). FCFE was $104m in FY19, a far cry from $LYV management’s “free cash flow – adjusted” of $499m. Cash flow is usually the one place free from “adjustments” so that’s a red flag ($VRX had “Cash EPS”).
