Reservoir Media has carved out a significant niche in the entertainment industry, operating a multifaceted music business that ranges from music publishing to rights management and artist representation. The company’s structure is comprised of two primary segments: Music Publishing and Recorded Music. The Music Publishing sector focuses on acquiring music catalogs and establishing contracts with songwriters, ensuring a consistent stream of royalties. Conversely, the Recorded Music segment is tasked with discovering new talent, acquiring sound recording catalogs, and managing marketing, distribution, and licensing operations. This diversified approach not only allows Reservoir to leverage its extensive library of over 130,000 copyrights and 36,000 master recordings but also positions the company for sustained growth amid evolving market trends.
The financial success of Reservoir Media is largely attributed to its strategic emphasis on subscription streaming, a sector that has shown considerable resilience and growth, marked by an 11.2% increase in this revenue channel in 2023. As streaming services burgeon, they have come to represent approximately 54.17% of Reservoir’s overall revenue across both segments. Despite these positive indicators, Reservoir’s stock performance reveals a paradox; since its initial public offering (IPO) via a special purpose acquisition company (SPAC) in 2021, the company has witnessed a 22.24% decline in share price.
The company’s financial metrics tell a compelling story. Since its first earnings report in March 2021, Reservoir’s gross profits have skyrocketed from $47.39 million to $89.38 million, alongside a significant rise in EBITDA—from $33.8 million to $54.4 million. Furthermore, the Music Publishing segment accounts for 66.41% of total revenue, experiencing substantial year-over-year growth of 14.74%, while the Recorded Music segment contributes 29.25% with an impressive 21.66% increase.
Irenic Capital, an activist investment firm, has taken notice of Reservoir’s situation and currently holds an 8.14% beneficial stake in the company. Irenic was founded by seasoned investors Adam Katz and Andy Dodge, who have a track record of engaging in strategic activism, primarily focusing on guiding companies towards spinoffs and broader reviews of their operational strategies. On September 30, 2024, Irenic publicly urged Reservoir’s board to consider a strategic review, igniting discussions around the potential for restructuring or even an acquisition.
While some may critique the notion of “sell the company” activism as being short-sighted, it is often a calculated response to market conditions. Their argument posits that Reservoir functions more as a collector of royalties rather than a conventional operating company. Thus, they advocate for a strategic review to maximize shareholder value. This suggests a recognition of the company’s considerable portfolio value while acknowledging that it may not fully realize its market potential as a publicly traded entity.
Despite Reservoir Media’s proven success, there is a growing critique regarding its status as a publicly traded entity. The original thesis behind going public was to exploit inflated SPAC valuations for acquisitions that could enhance revenue streams. However, as the market conditions have cooled, Reservoir’s valuation—trading at 8- to 9-times net publisher’s share—stands in stark contrast to industry peers trading in the mid-teens range. This disparity raises questions about the viability of Reservoir’s public company expenses without tangible benefits, leading many to speculate that it may be more advantageous to explore private buyouts or mergers with strategic buyers who can offer higher multiples.
Considering the current ownership structure, where the Khosrowshahi family controls a significant 44% stake and Irenic Capital has garnered a notable position alongside private equity firm Richmond Hill Investments, the prospect of a buyout becomes increasingly plausible. The Khosrowshahi family’s involvement at a leadership level may prove attractive to potential acquirers, providing continuity in management even as they expand their asset base.
Recent market precedents, such as the acquisition of Hipgnosis by Blackstone at approximately 18-times net publisher’s share, illustrate a growing appetite for music catalogs, particularly those with established revenue streams. This trend could significantly influence Reservoir’s valuation and potential acquisition discussions.
While Reservoir Media stands on the cusp of considerable opportunities for growth and expansion, its path forward will largely depend on how effectively it navigates the landscape of public company dynamics, activist influence, and evolving market conditions. As the music industry continues to evolve, Reservoir’s ability to adapt and reassess its strategic goals will be crucial in defining its future trajectory.