THE MAN WHO BOUGHT ELVIS
Investor Robert Sillerman is combining the King, American Idol, and other entertainment assets to build his next media conglomerate.
(FORTUNE Magazine) – Elvis left the building 28 years ago, but as a pop icon he's still hot. Over half a million tourists from all over the world stream into the shrine called Graceland each year. When his record company rereleased Elvis singles to promote his latest greatest-hits compilation in 2002, 19 of them became top five hits in Britain. (A hip-hop-style remix of "A Little Less Conversation" was a No. 1 hit in more than two dozen countries, including the U.S.) And Elvis impersonators are still fixtures in everything from movies to corporate events.
As a business, though, Elvis has been stagnating. Revenues at the company that manages his affairs, Elvis Presley Enterprises, have been flat at $40 million for five years. A costly restaurant venture in Memphis went bust. There is little profit to invest in potentially lucrative assets like the Heartbreak Hotel, across the street from Graceland. Elvis's 37-year-old daughter and heir, Lisa Marie, has been unhappy
that the business has been going nowhere: "We were doing good, but you can't stay the same," she says. "You either have to grow or go down." In other words, Elvis is a classic buying opportunity: The underlying fundamentals are sound, but current management has been unable to take the business to the next level.
At least so says a Wall Street entrepreneur who is hoping to make Elvis the centerpiece of his burgeoning media company--not only extending the King's reign but also taking advantage of technological and demographic changes rocking the media and entertainment industries. In just the past few weeks we've seen a flurry of deals by companies seeking to profit from this tumult: TV networks are offering shows for sale, AOL is selling vintage programs online, and cellphones and iPods can now deliver music, video, and TV. In other words, distribution companies are falling all over each other to reach customers through new, competing outlets. With so many formats vying for consumers' attention, content is king. And the King is content!
The man who bought Elvis is Robert F.X. Sillerman, 57, a Wall Street operator with a long history of minting money in the media business. In 1989 he sold a group of radio stations to Westinghouse (now Viacom) for $389 million. Eight years later he unloaded a bunch of stations to Hicks Muse for $2.1 billion. In 2000 he sold a company that owned concert venues to Clear Channel for a reported $3 billion.
In each case Sillerman assembled a collection of media properties--all in distribution--at low prices and then unloaded the bundle for a higher price. He seems to have a knack for selling just when markets are at their peak, which has given some buyers severe indigestion. Now, after "lying in the weeds" for a few years and fighting and beating cancer, Sillerman is at it again, pulling together another media empire, which--though Sillerman won't acknowledge that he has an endgame in mind--he'll ultimately look to sell for another big score.
Sillerman's latest publicly traded corporate incarnation is called CKX. The CK stands for "content is king," while the X is a reference to one of his middle initials (they are F.X., and he won't tell anyone what they stand for). Besides buying Elvis Presley Enterprises from Lisa Marie Presley last February, Sillerman and his lieutenants have purchased the smash-hit TV show American Idol and other properties from a company called 19 Entertainment, which was owned by British pop impresario Simon Fuller. Sillerman intends to buy more high-profile properties like these (think athletes and rock groups, for instance--Sillerman is tightlipped about possible deals), find new ways to distribute them, and increase their value. These are Sillerman's strengths: identifying trends in the media business before others, then gathering and deploying capital to make the strategy work. "Bob is like a Clint Eastwood character in an old Western movie," says Dennis Arfa, a business associate of Sillerman. "He rides into town and leaves with all the money and the women. He made a lot of people wealthy, and he made himself even wealthier."
VISIT WITH SILLERMAN for an hour or two in his Manhattan office, and you are likely to get a rapid-fire discourse on politics from the 1960s to today, or rock & roll radio, or Thoreau, or education in America, or all of the above. You may find him a bit quirky. He loves to party. He's been known to sneak up on people and scare them. And there are a couple of Sillerman stories that involve nudity. Says his longtime business partner, disc jockey "Cousin Brucie" Morrow: "Bob is very exhausting to be with. He has unbounded energy when it comes to business. He can outlast and outtalk anybody." Says a close colleague: "His BlackBerry messages start at 6 A.M. and never stop into the night. I should get a waterproof one for the shower."
At this particular sit-down, when Sillerman gets around to talking about CKX, he says, "Technology is breaking down the old lines of distribution. More and more content can go directly to consumers through cellphones, devices like iPods, and home video, which makes content even more valuable." But doesn't Sillerman's strategy fly in the face of what big media is doing right now? Aren't companies like Viacom and Time Warner disassembling or considering disassembling their empires, while Sillerman is putting one together? "It's different," Sillerman says. "Those companies promised two things. They wanted to marry content with distribution, where CKX will not be in the traditional distribution business. And they said they would synergize their content. Synergy is not important. It's a word I've never liked. That's not part of our strategy."
Though the Elvis business isn't that big yet, it gives us a window into how Sillerman operates. First, understand that Sillerman actually owns very little of Elvis's music. Elvis's legendary manager, "Colonel" Tom Parker (a.k.a. Andreas Cornelius van Kuijk), sold the rights to RCA--now part of Sony BMG--decades ago. What Sillerman bought was Elvis Presley Enterprises (EPE), a company that gets its $40 million in annual revenue from Graceland tours, onsite retailing, and licensing--each contributing a bit less than a third of the total--with the balance derived from an apartment complex and the Heartbreak Hotel.
To Sillerman, Elvis is an underexploited asset, like a poorly managed textile company or a baseball team without a marketing department. The truth is, for all of Elvis's transcendent mystique, EPE has never been much of a business. When the King died in 1977, his estate was a mess. Between Elvis's legendary free spending and the fact that he didn't own his songs, the situation was dire. "In February 1982 the probate judge told the trustees of the estate that he feared it would go bankrupt because of taxes and legal fees," says Jack Soden, a Kansas City money manager brought in to advise the Presley family. "We had to do something right away to make money, and that something was to open up Graceland for tours."
On the first day Soden and Elvis's ex-wife, Priscilla, opened up the Memphis mansion, 3,024 fans filed in, paying $5 each. Today about 600,000 visitors make the pilgrimage to Graceland each year (30% from abroad), paying between $22 and $55 apiece. Take a walk through Elvis's home with the throngs, and the feeling you get is reverential. "The Bolshoi Ballet came en masse to Graceland," Soden recalls. "All these ballet dancers from Russia were huge Elvis fans, and [their handlers] were asking for our help to get them out of here and back to rehearsal. They had a per diem, and they were missing meals and saving money so they could buy more stuff at the shop." Soden has escorted everyone from William F. Buckley to I.M. Pei through the hallowed halls. "I suppose there are all kinds of gratifying lines of work," he says. "This stands out as unique. I have never had one single boring day."
Soden, who will continue running EPE in the new company, enhanced the Elvis business by expanding into merchandising and licensing. Even so, says Lisa Presley, "there's only so far you can take a family-run business. What we wanted to do was to take this to another level." Lisa says that she, her mother, and Soden had spoken for years about bringing in outside investors and/or management, but nothing clicked. Then, Lisa says, the failure of the Elvis Presley's Memphis restaurant on Beale Street in 2003 made matters urgent. "We took on more debt than I felt comfortable with," she says. But an informed source says that Lisa Presley's spending habits were also an issue: She had been running through $5 million to $7 million a year, amounts that closely matched the annual net income of EPE. (A spokesman for Lisa Presley declined to comment.)
Sillerman, who had extensive exposure to the rock & roll business as a radio executive and concert promoter, realized that owning the rights to a rock act could be a great business. But it had to be a biggie to make economic sense. "We thought there were only three rock groups worth owning," says a source in Sillerman's camp, "Elvis, the Beatles, and the Stones. Elvis was available." (Note: CKX also recently bought MBST, a small talent agency in L.A., which does advisory work for the Beatles' company, so stay tuned.) Late last year Lisa Presley flew to New York to meet Sillerman face to face. "I liked him," she says. "He's obviously smart, and he doesn't b.s. around." As for Sillerman's take on Lisa: "I was impressed with how 'real' and grounded she was. Recognizing the environment she was raised in, I thought she was astounding. I also thought she was shrewd and perceptive. And she had a great sense of humor."
Here then are the terms of the deal between Sillerman and Lisa Presley: CKX paid $114 million for an 85% interest in Elvis Presley Enterprises; Lisa retains the other 15%. Lisa received $50 million in cash, plus $26 million in CKX common and preferred stock. Another $25 million from CKX went to pay off EPE debt. And $6.5 million went to Priscilla Presley for use of the family name--even though Sillerman wasn't legally obligated to pay her anything, since Priscilla and Elvis were divorced, and Elvis's estate went to Lisa Marie. The payment will no doubt make it easier for Sillerman to call Priscilla up and ask her to come to a ribbon cutting of a new Elvis property, for instance. (The balance is transaction costs.)
For its money, CKX got a 90-year lease on Graceland, stipulating, among other things, that the premises may not be used as "a massage parlor, a mortuary, or [for] the manufacture, sale, or distribution of feminine hygiene products." (Gives you an idea of how much attention Lisa and Soden pay to protecting Elvis's image.) CKX has the rights to the Elvis name, image, likeness, and trademark, which are currently used in 100 or so merchandising and licensing deals. CKX also gets the publishing rights to 650 songs, but owns the more valuable royalty rights to only the few songs Elvis recorded after 1973. CKX also gets royalty rights to 24 Elvis movies.
I ask Lisa about Sillerman's plans. "He doesn't want to mess with anything. He wants to do what we want to do." Like what? "I don't want to be like Martha Stewart and talk about what I shouldn't," Lisa says with a chuckle. Speak with executives at Graceland and in New York, though, and it quickly becomes obvious how they want to further elevate the King. Yes, Elvis's core fans are aging, but young people still are drawn to the man with the oversized Q-rating. Even very young people. Just ask the makers of the smash-hit movie Lilo and Stitch, who used an Elvis soundtrack to great success.
Within a matter of weeks it is likely that CKX will announce some sort of Elvis Presley or Graceland-themed casino in Las Vegas. Which would seem to be a natural--Elvis and Vegas go together like peanut butter and bananas. Striking a deal shouldn't be that difficult. Sillerman already has 18 acres on the Strip through MJX, a real estate company he controls. Bear Stearns analyst R. Glen Reid says to also look for a 2,000-seat Elvis theater in Vegas. And get this zinger from Reid's report: "CKX apparently has the right to shut down impersonator shows." (Say it ain't so!) "Impersonator shows can, if properly done, extend the brand," Sillerman says. "We have to be careful to not deprecate Elvis's legacy or to damage our authorized and official Elvis shows."
Down the road EPE may construct more Graceland-like properties in places such as Dubai and Macau, and perhaps develop a concept similar to the Hard Rock Cafés in Europe. And don't forget about the Heartbreak Hotel. Sitting kitty-corner from Graceland across Elvis Presley Boulevard, it is a 128-room boutique property with a small pool and a tiny bar, perennially packed to the gills with Elvis fans. The hotel, Sillerman and Soden say, is just screaming to be expanded, upgraded, and replicated in other locations. "No question we could build a convention-sized hotel here," says Soden.
ALMOST IMMEDIATELY after Sillerman closed on the Elvis deal, he opened his wallet again and purchased 19 Entertainment, a business with even more moving parts than Elvis. In 19, Sillerman saw a small but dynamic media company with one of the hottest TV shows on the planet. That show is American Idol, and as with Elvis, Sillerman is convinced he can make it an even bigger deal than it already is.
19 is the brainchild of Simon Fuller, whom Sillerman describes as a "cherubic bundle of nonstop creative energy." Fuller started out as a talent scout in the 1980s--his company is named after a hit song by an artist he managed--discovering and working with British rock groups like Spandau Ballet, Billy Idol, and Ultravox. He managed Annie Lennox and the Eurythmics, and then created the Spice Girls. But Fuller had an even bigger idea, a kind of interactive on-air talent show. In 2001, Britain's ITV put Fuller's baby, Pop Idol, on the air. It was a smash right off the bat. "But when I took it to America, almost everyone rejected it," Fuller recalls. "They said music doesn't work on TV in America. Only Mike Darnell [at Fox] got it straight away."
But isn't American Idol just another reality show that will soon run out of gas? Maybe, but maybe not. "American Idol is much more like a game show than a reality show," says Fuller. "And game shows are the longest-lasting shows on TV. Jeopardy, Wheel of Fortune, The Price Is Right--these shows go on for decades." This past season American Idol ratings averaged over 27 million viewers per episode, up 5% from last season. And the show garners the highest ad rates on network TV, between $660,000 and $705,000 for a 30-second spot, which is higher than CSI or Desperate Housewives. Why? Because American Idol is what's known as event programming, meaning that because it's a contest, you almost have to watch it live. That greatly reduces the number of viewers who DVR it and skip the commercials. Fuller's company doesn't get a direct share of ad revenues from Fox; rather, it receives a $1.2 million fee per episode. 19 is currently renegotiating the fee for next season, and some think the ante could be upped to $2 million per episode (though a reported flap over American Idol judge Simon Cowell's compensation could be complicating matters).
And that's just part of the American Idol money train. The top contestants on the show are signed to Sony BMG, and 19 gets 10% of their recording revenue. So far Idol stars like Kelly Clarkson and Clay Aiken have sold over 14 million albums. Then there are concert tours and merchandising. The show is also being franchised in 100 countries. (Per capita, Canadian Idol is much bigger than its U.S. counterpart.) "Think of how we can continue to expand the show," says Fuller. "What about a world champion Idol drawn from all the different nations?" The show venue may be moved from Los Angeles to Las Vegas to save money (and perhaps to fill a certain 2,000-seat theater). As for spinoffs, did we mention that another smash hit on Fox, So You Think You Can Dance, is produced by Fuller too? 19 also manages the career of soccer superstar David Beckham and his wife, Victoria (a.k.a. Posh Spice). And Fuller is looking to bring a gritty nighttime soap opera that is popular in Britain to America next summer.
So why did Sillerman buy Fuller's company? "American Idol is the No. 1 show on television, drawing some 30 million viewers, which is great, but it means that fewer than one out of ten people in America watch it," Sillerman says. "But if you walk down the street, you'll be hard-pressed to find somebody who doesn't know what it is. There are so many ways to exploit that level of awareness. Connecting the show to phones, through the Internet, through merchandising, and ways I can't talk about yet."
Sillerman paid $196 million to buy 19 Entertainment. Some $124 million was in cash upfront and $31 million in stock, with the balance to be paid in cash or stock after Fuller's company reports its year-end numbers. 19 did some $92 million in revenues last year--with about a third coming from the Idol shows--and earned $12.6 million. Fuller is signed up to head 19 Entertainment in a five-year contract. "I have a million ideas all the time," says Fuller, "but before I could only do one a year. Now that I'm a part of CKX, I have the resources to do three or four." Sillerman hopes that's a positive, not a negative.
WHAT KIND of person would grow up to have business dreams like these? On Wall Street they like to say that Bob Sillerman hardly knows failure, but he saw it firsthand growing up. Sillerman was born into a media household, raised in the Riverdale section of the Bronx, and attended top private schools in New York City. His father, Michael McKinley Sillerman, was a radio executive who went bankrupt when his son was 13. "I suppose if you were a psychiatrist you could say I wanted to do well, where my father had had a lack of success," Sillerman says. Michael Sillerman died in 1980, just when his son's career was taking off.
Young Sillerman graduated magna cum laude from Brandeis in 1969 after becoming immersed in counterculture politics and rock & roll. He set up his own business, Youth Markets Consultants, to help big companies sell their wares to the Now Generation. But Sillerman was drawn to his father's business. In the mid-1970s he scraped together $600,000 and enlisted "Cousin Brucie" Morrow, then one of the top deejays in the country, to become his partner and buy a rock & roll radio station in Middletown, N.Y. "Bob can sell igloos," says Morrow. "Bob can sell anything--it doesn't matter--he has that kind of head." (Morrow says it was he who enlisted Sillerman, not the other way around.)
Brucie and Bob bought more stations and worked their magic on operations. "Bob went out and taught salespeople; I taught the on-air staff. It was a very good, good combination," says Morrow. The duo's tactics could be unorthodox. Once Morrow had a beef with the late-night deejay at their Middletown station. "The guy didn't have any energy," says Morrow. "I thought he was asleep. The studio of course had a glass wall. So in the middle of one night, Bob and I took off all of our clothes and ran back and forth in front of the glass naked. We cured him." By 1985 the pair had accumulated some 70 stations, which they sold for some $50 million.
In the mid-1980s the Federal Communications Commission was beginning to loosen its restrictions on the number of radio stations that could be owned by a single operator. That lit a fire under the radio business, and Sillerman plunged back in, buying more radio stations, leveraging up his new company, and securing investments from the Bass family and Security Pacific bank, among others. Sillerman was known for pushing the envelope. At various points heated negotiations and lawsuits ensued between Sillerman and the likes of PaineWebber, Steinhardt Partners, and W.R. Huff, who alleged that Sillerman was trying to shortchange investors. But nearly every time Sillerman sold, he and his investors made money. His timing seemed impeccable. What was most impressive about his $389 million deal with Westinghouse (which was convinced that it needed to become a big player in the business) in 1989 wasn't that it was his biggest score ever; it was the fact that the market for radio stations tanked soon after.
To Sillerman the soft patch was an opportunity to reload. He set up what became his signature company, SFX, which he took public in 1993 at $15 a share. Working with Steve Hicks--brother of Tom Hicks, the head of Texas buyout firm Hicks Muse--Sillerman embarked on a dizzying run of acquisitions, creating one of the largest radio station companies in the country. (Critics at the time complained that Sillerman overstepped his role by collecting fees for acting as both his company's financial advisor and investment banker during this period.) Steve Hicks left to join another radio venture after a few years, and in 1997, Sillerman sold SFX, which then owned some 70 radio stations, to Hicks Muse for $75 a share, or $2.1 billion. Sillerman's personal take was a reported $219 million. Says a top Wall Street banker: "He's a very smart guy, but I don't think you want to be sitting on the other side of the negotiating table from him."
By then Sillerman was already toiling away on his next project, SFX Entertainment, a company that would own concert venues and other media properties. (Hicks Muse agreed to spin this business off to SFX shareholders.) In short order Sillerman went on a billion-dollar shopping spree, buying dozens of concert halls--like Roseland in New York and the Fillmore West in San Francisco--in major cities across the country. Some noted that Sillerman was paying huge amounts of goodwill in his deals, so eager was he to build the company. Sillerman was looking to become the single big fish in this business so that when acts like Eric Clapton went on tour, his manager would deal with SFX and SFX only when booking venues. Several managers and big-name acts from Ozzy Osborne to Shania Twain reportedly bristled over having to negotiate with such a corporate gorilla. Sillerman also bought the business of sports superagent David Falk (he repped Michael Jordan, among others) and other pieces of the sports world, such as figure-skating championships. And then in early 2000, lightning struck again. Clear Channel, which had already purchased many of Sillerman's radio stations from Hicks Muse, agreed to buy SFX Entertainment for a reported $3 billion.
After that big deal, as with so many American business stories in 2000, things began to sour. Clear Channel had "integration issues" with SFX, according to one analyst, and now plans to spin off that business by early next year. Clear Channel's stock, which hit a high of $95 in 2000, is trading at $32.
Around that time Sillerman was diagnosed with tongue cancer and underwent chemotherapy, which sidelined him for several months. Sillerman, a triathlete who loves vigorous games of volleyball and basketball, has recovered and now sports a yellow Livestrong bracelet. Sillerman insists that cancer hasn't impeded his business or his social life, which can be a bit wild and woolly. "He likes to jump out of the bushes or hide in hotel rooms and scare people," says Cousin Brucie. "He's like a little boy." While some might find that a 25th wedding anniversary is best celebrated privately, Sillerman held his at the Manhattan rock hall Irving Plaza with hundreds of guests. Lately Sillerman has become more guarded, though. And don't even think about asking him what his middle initials, F.X., stand for. "I've tried to get him drunk to get him to tell me," says Brucie. "Didn't work." Okay, so come on, Bob, what does F.X. stand for? "I could tell you, but I'd have to kill you," he says.
HOW BIG WILL CKX become? As big as Sillerman's ambitions, perhaps. Attracting funds, at least at this point, won't be a limitation. "It's funny, when we needed money we had a difficult time raising it. Now when we don't need it, we're flooded with it," Sillerman says. CKX raised $251 million at its IPO earlier this year, which it used to pay back $150 million in loans from Bear Stearns --the rest it paid directly to 19 Entertainment or kept as capital. CKE's stock fell from a high of $28.80 in early May to a current price of $12 and change. (Rumors suggesting that Sillerman's next big acquisition has been delayed have been a drag on the stock.) Even so, Sillerman's 47% stake is worth some $400 million. His cost basis on these shares? Some $20 million. Not bad for a year's work.
With a market value of $1.1 billion, is CKX overvalued? Undervalued? I ask Sillerman about his revenue and income projections for his Elvis and American Idol businesses. "Well, it's a little early to ask that question." Really? "That's not the basis of CKX. This is a long-term perspective, [but] a 10% return on equity from our perspective would be insufficient."
CKX already carries a load of goodwill, $14 million from the Presley deal, and $111 million from the 19 transaction. That means $125 million out of the $306 million paid for these two companies exceeds any tangible assets, including the value of trademarks. Which suggests that Sillerman is either very confident in his ability to create more value with these two companies, or believes he can sell them to someone who has even more confidence, or both.
What would be the ultimate winning scenario for Sillerman? Think about it. Elvis, a poor boy from Tupelo, Miss., comes up to Memphis, manages to get himself into Sun Records, and lays down the track to "That's All Right (Mama)." A local radio station airs it, the calls come streaming in, and Elvis is on the way to glory. Today's star- making machinery is half-a-century and light years away from that process. But stars still do get born. In fact, there's a hit TV show in the business of finding them. So what if the next Elvis is discovered on American Idol