Deezer did not make a good start on Tuesday, July 5 at the Paris Bourse. On its first day of trading, the second French unicorn stock fell 29%. Worse: the operation allowed the online music service to raise only 143 million euros, far from the 275 million expected. This fiasco has several explanations.
A difficult business model
Since its creation in 2009, the streaming platform has never made any money. Worse: the platform continues to burn cash. Last year, free cash flow was negative at 47 million euros. However, a positive cash flow is finally promised for 2024. The listing should make it possible to raise money to hold out until then. Because the funds raised previously (330 million euros in three rounds of funding) are almost exhausted. At the end of December, cash on hand amounted to only 35 million euros, of which 25 million came from a PGE (loan guaranteed by the State).
This means that music streaming is a low-margin business. “We have to pay around 70% of our revenue to record labels and rights holders, plus around 10% transaction fees to app stores, which leaves us with a gross margin of 20%,” explained Deputy Managing Director Stéphane Rougeot. Spotify is doing slightly better, with a gross margin of 27% last year.To further increase the bill, the record companies obtained a guaranteed minimum remuneration, regardless of subscribers' actual listening to their songs. In addition, they requested additional compensation paid in Deezer shares. They thus end up with 15% of the capital (on a fully diluted basis), which is worth 156 million euros at the IPO price. If we factor in this stock-based compensation, Deezer's gross margin drops to 12%
A difficult time for tech valuation
Deezer jumped into the big bath when the water is very cold. Tech stocks are falling on the stock market. In particular, the price of Spotify has been divided by 3 since November on the New York Stock Exchange.
Despite this, Deezer was aiming for a high valuation: 1.05 billion euros for fully diluted capital without debt. This valuation was higher than that targeted (884 to 1089 million euros) during the aborted IPO of 2015, which was obviously too greedy. It was of the same order as during the fundraising carried out in 2018 with the Saudi prince Al Walid, which was 960 million euros (on a fully diluted basis). Finally, it was lower than that used for share buybacks of start-ups (Mugo) in 2020 and 2021, which amounted to 1.27 billion euros.
Above all, the targeted valuation was higher than that of Spotify, and therefore difficult to justify. In their report, the merger auditors pointed out that “the market multiples observed on Spotify have been in sharp decline for approximately 6 months. In this context, Spotify's revenue multiples from 2022 to 2025 calculated on short references (one month) show Deezer's values lower than the value retained" for the listing. To which Stéphane Rougeot replied: “this listing is not motivated by the valuation of tech companies on the stock market, but by Deezer’s development strategy”. Finally, Tuesday, July 5, the Stock Exchange estimated that Deezer was worth only 678 million euros….
What’s about the SPAC ?
A SPAC, or special purpose acquisition company,is one of the hottest trends on Wall Street. but What about Deezer using it ?
To go public, the online music service had chosen the path of merger with a company already listed for a year, IP2O. The latter is a company that has raised funds for a future acquisition, what is called in financial jargon a SPAC (special purpose acquisition company). These SPAC are nicknamed “blank check company”: when they go public, the SPAC does not yet know what its future target will be, and is therefore content to indicate to investors the targeted area. The only indication given is the pedigree of the founding directors of the SPAC, called sponsors, who hold a small stake in the SPAC. Here, it was the Pinault family (via its family office Artémis), the investment banker Matthieu Pigasse, and the German Iris Knobloch (former boss of Warner Media for France and Germany and new president of the Cannes film festival).
To make matters worse, these sponsors were linked to the bankers who conducted the operation. I2PO was advised by Société Générale and Matthieu Pigasse's bank, Centerview, which received a commission of between 3.5 and 4.5 million euros on this occasion. For its part, the board of directors of I2PO was advised by the Lazard bank, of which Iris Knobloch is a director. We are never better served than by ourselves…Last peculiarity of SPAC: those who buy their shares can ask for their money to be returned, especially if they do not like the target. This is what happened here. The vast majority of I2PO shareholders have asked to be reimbursed. Of the 275 million euros raised during its IPO, 251 million euros had to be returned. Fortunately, Deeezer had covered its back by raising 119 million euros in parallel as part of a PIPE (private investment in public equity). Among the investors of this PIPE, we find the current shareholders of Deezer, but also Artémis (15 million euros), Bpifrance (29 million), the publisher Media Participations (10 million), Merit (the family office of the Saadé, 5 million), the Saudi family Abdulaziz Alhokair (5 million) or Marco Pacchioni (founding boss of Puressentiel, 1 million).
This bitter failure is the first encountered by a SPAC in France. where these vehicles appeared in 2016 with the audiovisual producer Mediawan, whose sponsors were Matthieu Pigasse (already), Xavier Niel and Pierre-Antoine Capton. But in their country of origin, the United States, SPACs are no longer fashionable, as Les Echos recently noted. In the first six months of 2021, only 70 SPACs returned to Wall Street (compared to 613 in 2021), raising only $12 billion (compared to $83 billion in 2021). In six months, the specialized ETF SPAC index has lost half its value, twice as much as the S&P 500.