PrivCo: APPLE Acquires BEATS Electronics for "Unjustifiable" Valuation: The
True Financial Story of BEATS Electronics: Was
Debt-Heavy, Low-Margin, "Distressed Asset"
NEW YORK, NY -- (Marketwired) -- 05/29/14 -- Apple is acquiring
Beats Electronics for $3.0 billion in cash and stock, Apple confirmed
today. Apple will pay $2.6 billion in cash and $400 million via
650,000 shares of Apple stock for the audio electronics and most
recently nascent streaming music company. PrivCo's analysis of
privately-held Beats' financials shows:
-- Despite Beats' rapid top-line revenue growth, true growth has slowed
markedly, and recent "revenue growth" was primarily due to a material
accounting change where Beats shifted from being a royalty-check
recipient to taking product inventory itself
-- Beats, since its revenue model change beginning in 2012, has become a
low-margin electronics business, underperforming its peers on every
key financial and operating metric (from gross and net margins to
-- The new Beats-as-manufacturer has gone from high margin brand
licensing business, to a consumer electronics maker with
below-industry-average, single-digit, profit margins
-- The transformed Beats requires massive cash to fund inventories,
advances to suppliers, growing receivables, and distribution and
warranty costs, leaving the company materially in debt (and was days
from insolvency less than a year ago)
-- Beats has little value as a streaming music service (which is
technically separate from Beats, although Apple is buying both
businesses), and its value to Apple lies primarily in the possibility
of Beats easing Apple's entry into the "Living Room" by enhancing
AppleTV, and in wearables by making headphones (rather than watches)
-- already worn by young consumers -- as the basis for Apple's
wearable tech strategy.
-- Dr. Dre -- due to millions in dividends paid to himself from Beats
with borrowed money several months ago -- will become the "First Hip
-- Despite some benefits to Apple, Cupertino is substantially overpaying
for Beats Electronics with a premium valuation that no rational
comparable can justify.
PRIVCO'S FAIR VALUE OF BEATS: $1.122 billion
Less DEBT: $300M
EQUITY VALUE: $822 million
-- "CEOs Can Be Star-Struck. But They Can't Be Blind."
"Beats took its manufacturing in-house in 2012, turning Beats into a
low-margin electronics maker. After buying back HTC's stake in the
company with $265 million in borrowed money due within 12 months,
Beats Electronics was a distressed business by 2013 by any standard.
New lenders were balking at Beats' plan to borrow more money to not
just pay off its looming debts, but to pay Dre and Iovine a
quarter-billion dividend to boot. The company was in a corner until
Carlyle stepped in. And now Apple's coming to the rescue as Dre's and
Beats' final savior." Sam Hamadeh says, "As for the King's Ransom
Apple is paying, no traditional valuation measure applied to Beats as
a business justifies the price. Although even CEOs become
star-struck, they shouldn't ever become blind. We must assume Apple
and Tim Cook have grand plans to which we're not privy."
To access full analysis and press statement with graphics:
Based in New York, PrivCo is the leading provider of
private company financial data and business research, with exclusive
financial data on over 418,339 private companies.
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PrivCo Founder & CEO
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