Viagogo is using add-backs and synergy projections from its acquisition of StubHub to more than halve the combined company’s opening leverage. But the acquirer’s history of regulatory violations is making some buysiders wary of its aggressively adjusted metrics, eight buysiders told Debtwire.

StubHub should help unlock growth and strong free cash flow. However, sources suggested that cutting marketing expenses and headcount to the extent implied by the company’s adjusted EBITDA metrics would leave the company vulnerable, arguing that leverage could easily exceed the 3x marketed level.

Viagogo, which is headquartered in Switzerland, is buying California-based StubHub from eBay for USD 4.05bn. Viagogo is majority owned by Madrone Capital Partners, Bessemer Venture Partners and Eric Baker, CEO and founder of Viagogo, with Baker holding majority voting control.

To help fund the deal, Viagogo is raising a Ba3/B+ USD 1.475bn seven-year first lien term loan, with a USD 300m-equivalent euro loan carved out and USD 325m of second lien bonds, alongside a new USD 100m revolver.

Lead arranger JPMorgan is guiding the US term loan at Libor+ 400bps with a 0% floor and a 99 OID, while the euro tranche is guided at Euribor+ 400bps with a 0% floor and a 99 OID. Commitments are due 28 January.

Viagogo is also providing USD 1.8bn of new cash equity, and raising USD 600m of preferred equity alongside the credit facility and second lien notes.

The sellside is marketing the deal on a heavily adjusted pro forma EBITDA figure of USD 595m, more than half of which comes from projected synergies. Of the remaining USD 280m, some USD 156m comes from add-backs for actions including headcount reduction and compensation changes.

Giving full credit for synergies and addbacks, the combined entity will be levered 2.5x through the first lien term loans and 3x through its second lien notes. While some synergies are expected, buysiders noted that leverage balloons to 6.4x if giving credit only for the other addbacks.

Sources speaking with Debtwire said they believe some of the addbacks are justified and could be realized. However, they took issue with the company’s expected cost savings from headcount reductions and its projected marketing synergies.

Viagogo is projecting roughly USD 315m of pro forma synergies, of which USD 125m is dedicated to cutting domestic headcount, USD 132m for marketing and USD 15m for international headcount.

“If the company really cuts that much in marketing and headcount, they’ll damage the brand and disrupt the business, ultimately hindering growth,” one of the sources said.

Two sources gave the company credit for the addbacks in the combined adjusted EBITDA figure, but not the synergies. That implies free cash flow of USD 145m-160m (8%-9% of total debt), based on USD 280m of adjusted EBITDA less USD 10m-20m of capex and USD 110m-USD 115m of interest expense.

Another source gave the company credit for half or roughly USD 70m of the headcount synergies and USD 20m of overhead costs at USD 370m of pro forma EBITDA, bringing pro forma free cash flow to USD 235m-250m.

Funny money

StubHub and Viagogo operate online marketplaces for reselling tickets to events such as concerts and sporting fixtures.

StubHub’s LTM 30 September revenue totaled USD 1.1bn, according to Moody’s. Viagogo generated USD 73m of revenue over the same period. Moody’s predicts combined revenue of USD 1.3bn for 2019.

Viagogo’s standalone earnings are also heavily adjusted, two of the sources noted. Excluding addbacks, the company generates essentially zero EBITDA, they said.

Sources compared the aggressive addbacks to software provider Cision’s LBO by Platinum this week. Cision’s marketed EBITDA of USD 313m EBITDA was boosted by at least USD 140m of addbacks, ranging from run-rate cost savings to deferred revenue reductions.

Grow to survive

By next year, the secondary ticket resale market is on course to generate USD 15.2bn, according to Technavio.

The merger gives the combined company a dominant position in the US market, through StubHub, and European markets, through Viagogo, with room for improvement in the Asia-Pacific market, said three of the sources.

Moody’s states the combined revenues for Viagogo and StubHub have grown annually at an 8% rate since 2016, with the combined company expected to continue growing at around 5% per year. However, buysiders noted the risks of the smaller Viagogo integrating the much larger StubHub.

The combined company will also have to contend with competition from newer startups such as Vivid Seats or SeatGeek, the sources said. Vivid Seats generated less than USD 700m in revenue in 2018, according to Moody’s.

Sources noted lower prices on Vivid Seats, compared to StubHub and Viagogo, and also highlighted differences in SeatGeek’s model. SeatGeek’s listed prices include fees and shipping, while StubHub and Viagogo break out fees out only after a user has selected their ticket.

Two of the sources also pointed out that from an investor’s standpoint, Vivid Seats and SeatGeek are less subject to regulatory investigation.

“The great thing about startups is that they’re newer and they haven’t had issues with regulators,” said one. “When a company is suspended due to regulatory reasons, that shows investors that it’s much more aggressive and not catering to consumer needs.”

Running risks

Investors cited regulatory risk as a major concern for the merger. Many ticket resale platforms have faced criticism in the past for failing to prevent scalping—the practice of reselling tickets for significantly above box office prices, which is illegal in several US states.

Viagogo is no stranger to regulatory worries. In 2018, the company faced scrutiny and repeated legal action from the Competition and Markets Authority (CMA) for failing to comply with consumer protection rules.

Resale sites must include information on “whether there is a risk a customer might be turned away at the door, which seat in the venue the customer will get, and who is selling the tickets, so customers can benefit from enhanced legal rights when buying from a business,” according to a CMA statement.

Viagogo made changes to its website, but the CMA deemed them insufficient. The CMA also claimed that the company sold tickets with resale restrictions, and was unclear about ticket availability and seat location. In July 2019, the CMA charged Viagogo with contempt of court.

Following the CMA investigation, Google suspended Viagogo from paid advertising in July 2019 on its search engine due to a breach in guidelines.

Google changed its guidelines in 2018 to ensure secondary ticket sellers made it clear on their websites that they are not primary ticket sale platforms and that prices could be above box office levels. Google accused Viagogo of profiting from charity concerts, selling faulty tickets, and colluding with scalpers.

For now, these regulatory troubles are somewhat resolved— Google reinstated Viagogo as an advertiser in November 2019, and the CMA suspended its legal action a month earlier. However, four of the sources said they would likely impact Viagogo’s 2019 earnings.

On the business front, Viagogo can most closely be compared to the much larger Live Nation, which has a USD 15.526bn market cap and is a regular high yield issuer. Live Nation’s 3Q19 ticketing revenue increased to USD 388m, up from USD 368m a year prior, according to SEC filings.

Live Nation has also faced trouble with regulators. It was being investigated by the US Department of Justice in December for pressuring venues into using Ticketmaster, also owned by Live Nation.

The company reached a settlement “in principle” with the DOJ later that month to extend and clarify the consent decree for the Ticketmaster-Live Nation merger it was accused of violating. Live Nation has also admitted to assisting performers in scalping their own tickets at higher prices.

Sources pegged Live Nation as a stronger credit than Viagogo, because of its larger size and greater diversification. Live Nation’s USD 950m L+175bps TLB due 2026 was last quoted today in the 100.188/100.688 context, in line with recent levels, according to Markit.

That implies a yield to three-year call of 4.75%, compared to 6.88% on Viagogo’s new offering—accounting for Live Nation’s higher first lien credit rating of Ba1/BB. Live Nation’s total leverage was 4.1x as of 30 September, according to Moody’s.

StubHub and Viagogo did not respond requests for comment. JPMorgan did not respond to a request for comment.

2020 Debtwire