Golnar Khosrowshahi, Founder and CEO of Reservoir Media Management, Inc. attends Variety, The New York Party, at Loosie's Nightclub on October 5, 2023 in New York City.
Jamie McCarthy | Diversity | Getty Images
Company: Reservoir Media (RSVR)
Business: Reservoir media operates a music publishing company, a music recording company, a management company and a rights management unit in the Middle East. The Company operates through two segments: Music Publishing and Music Recordings. The Music Publishing segment is engaged in the acquisition of shares in music catalogs from which royalties are generated, as well as the signing of contracts with songwriters. The Recorded Music segment acquires recorded music catalogs and discovers recording artists, as well as markets, distributes, sells and licenses the music catalogs. His publishing catalog includes compositions written and performed by Joni Mitchell, the Isley Brothers, Billy Strayhorn, Hoagy Carmichael and John Denver. Songwriters include Ali Tamposi, Jamie Hartman, Oak Felder and Steph Jones. It represents over 150,000 copyrights and 36,000 master recordings.
Market value: $493.95 million ($7.59 per share)
Stock chart iconStock chart icon
Reservoir Media's year-to-date performance
Activist: Irenic Capital Management
Percentage ownership: 8.14%
Average cost: $6.54
Comment from activists: Irenic Capital was founded in October 2021 by Adam Katz, a former portfolio manager at Elliott Investment Management, and Andy Dodge, a former investment partner at Indaba Capital Management. Irenic invests in listed companies and works with company management. So far, their efforts have focused on strategic activism and recommending spinoffs and sales of companies.
What happens
On September 30, Irenic announced that she was calling on the company to conduct a strategic review and form a special committee of the board to oversee the review process.
Behind the scenes
Reservoir Media (“RSVR”) is an award-winning independent music licensing company with a portfolio of over 130,000 copyrights and 36,000 master recordings, primarily focused on stable music that has remained popular over time, including tracks by Hans Zimmer, Joni Mitchell and John Denver. After 12 years as a private company, RSVR went public in July 2021. The company started through a merger with the special purpose vehicle Roth CH Acquisition II, whose sponsor Adam Rothstein is currently a board member of Reservoir. Since then, the company has continued to grow year-over-year, nearly doubling its gross profit year-over-year since its first earnings report in March 2021 from $47.39 million to $89.38 million, while earnings before interest, taxes, depreciation, etc Depreciation and amortization also increased from $33.8 million to $54.4 million. The company's business model is divided into two main segments: music publishing, which accounts for 66.41% of total revenue, and recorded music, which generates 29.25% of total revenue. Both segments grew 14.74% and 21.66% year-on-year, respectively. A primary source of revenue for the company is subscription streaming, the industry of which grew 11.2% in 2023, accounting for approximately $14 billion in revenue. Streaming and download services currently account for approximately 54.17% of Reservoir's total revenue between the two segments. Despite this promising financial performance, the company has still managed to lose 22.24% of its share price since its SPAC IPO in 2021.
Irenic first reported holding a position in RSVR in its third quarter 2023 13F filing, and the company later filed a 13D on December 20, 2023, when the stock was trading at approximately $7 per share. On September 30, 2024, Irenic filed a 13D amendment reporting 8.14% beneficial ownership at an average price of $6.54 per share and announced that the company would conduct a strategic review and should consider a possible sale. We're the first to criticize “selling your company” activism as short-term, but sometimes it makes sense, and this is one of those situations. Reservoir is not an operating company, but rather a collector of royalties. In this way, their assets function similarly to a bond that pays a coupon. The coupon here consists of the royalties, and these payments increase in two ways. First, the musician can sell or stream more music and collect more royalties. RSVR's library is mostly made up of experienced artists who are unlikely to be experiencing spikes or dips in their royalty stream at this point, so that's unlikely here. Second, the company will see an increase in royalties without increased streaming as streaming companies increase their fees to end users, which happens regularly. Therefore, Reservoir should have a very stable and predictably growing revenue stream. The thesis for this company going public via a SPAC is that it could use its fully or overvalued SPAC shares to acquire competitors that trade at lower multiples, which would allow them to have a lower cost of capital to increase royalties. This was a great idea when SPACs commanded sky-high multiples, but those days are over. The company currently trades at just 8 to 9 times net publisher share (NPS is a commonly used industry-specific metric that indicates the amount of revenue a music publisher receives from a song, minus the costs incurred associated with the payment of license fees). are trading in the mid to high teens. As a result, this thesis is invalid and there is really no reason for a company like this to have the expense and transparency of a public listing without the benefit of a lower cost of capital.
Now the acquirer becomes the purchaser. Ideally, a strategic buyer would come into play who would be happy to pay more than 15x NPS for this company, which is entirely possible. However, RSVR is more likely to be sold to a financial buyer for two reasons. First, the Khosrowshahi family owns 44% of the common shares and Golnar Khosrowshahi is the CEO. It is very unlikely that a transaction will occur in which the family is no longer involved and Khosrowshahi is no longer CEO. Secondly, she is an outstanding CEO in this industry and any financial buyer should be happy to have her at the helm while acquiring additional assets. There is also a current precedent for this: In July 2024, the peer player Hipgnosis was acquired by Blackstone at around 18 times NPS. Hipgnosis' portfolio consisted of 138 catalogs containing more than 40,000 songs and was significantly smaller than that of Reservoir, whose catalogs contain over 130,000 copyrights and 36,000 master recordings. Additionally, private equity firm Richmond Hill Investments currently owns 21.85% in addition to the Khosrowshahi family's 44% stake and Irenic's 8.14% stake. Any combination of these three investors could put some of their equity into a buyout deal to make it easier and more rewarding for a financial buyer. Richmond Hill Managing Partner Ryan Taylor is on RSVR's board of directors and the company gained his position when one of its portfolio companies was acquired by RSVR. We do not believe Richmond Hill is a likely candidate for Reservoir privatization.
Given the Khosrowshahis' 44 percent stake, any confrontational activism isn't an option here, but that's okay because it's not what Irenic is looking for. The company believes in the management team and sees itself as a good partner to the company and a protector of shareholder value.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, an investment fund that invests in a portfolio of 13D activist investments.