Montreal media company Stingray Digital Group is going public with a $120-million share offering, testing investor appetite for its lucrative business as its core television platform is under threat from alternatives such as Netflix.
The privately held company is best known in Canada for its flagship product Galaxie, a continuous, commercial-free music streaming service that has become a staple on pay TV channel lineups across the country and in 110 other nations. It filed plans with regulators on Friday to list shares on the Toronto Stock Exchange.
"There is strong investor interest in non-resource growth equities," said Robert Goff, an analyst with Euro Pacific Canada, noting children's TV content creator DHX Media Ltd. is a comparable company now enjoying market interest on the back of strong execution and content. "Companies with recurring revenues and successful acquisition histories are commanding premiums."
The share sale comes amid a wave of new public offerings as investor demand builds for non-energy plays. It follows the wildly successful $200-million offering by restaurant congolomerate Cara, which was 20 times oversubscribed, and a filing last week by Ottawa retail commerce platform Shopify Inc. to go public in New York and Toronto.
It is the first media company IPO in Canada since Fluid Music Canada's $27-million offering in 2008, according to Thomson Reuters data. Fluid was later rebranded as Mood Media.
Founded by serial entrepreneur Eric Boyko in 2007, Stingray operates out of a slick office space on the western fringe of Old Montreal. Dozens of Stingray music curators spend their days creating playlists heard by TV subscribers around the world through big-name clients such as Bell, Comcast and Dutch cable operator Ziggo.
Stingray buys licenses to songs and then makes money selling the music as pre-programmed packages to cable providers, satellite operators and other broadcasters. It typically gets paid a fee for every subscriber. It also has a unit that sells customized music for commercial clients including Subway and Fairmont hotels.
The company is betting that in an era where television is slowly losing ground to the Internet as a content-streaming medium in mature economies, investors will nevertheless buy into the company's sheer reach, steady growth story and predictable cash flow. It argues that despite headlines about cord-cutting in North America, the number of paid TV subscribers is still growing globally.
"We're an international play," Mr. Boyko, 45, said in an interview last year. The company declined to comment Friday.
Stingray claims that 110 million pay-TV subscribers currently have access to its content, eclipsing the global subscriber base of Netflix and SiriusXM radio combined. With a record of successful takeovers and more international opportunities on the burner, the company has said its goal is to reach 400 million subscribers by 2020.
Still, there's no certainty Stingray will get there.
In the risk factors section of the IPO filing, Stingray acknowledges that growing its subscriber base depends on the ability of pay-TV providers "to deploy and expand their digital technologies, their marketing efforts and the packaging of their services' offerings." In Canada, most of the company's current long-term agreements with pay-TV providers include commitments to carry Stingray's audio service on their basic package offerings but it's unclear how that will evolve in the future.
The company also admits competition for listeners' attention and song rights purchasing is fierce, citing iHeartRadio, Pandora, iTunes Radio, LastFM, Google, Songza, YouTube, Spotify, Slacker as rivals as well as traditional radio, satellite radio and Internet radio. "The audio and video entertainment industry is a rapidly evolving market, which makes it difficult to evaluate our current business and future prospects," the regulatory filing states.
The offering is being underwritten by GMP Securities, National Bank and Bank of Montreal.
The company's regulatory filing shows Stingray has increased both sales and profit every year since 2008, posting earnings before interest, taxes, depreciation and amortization of $27-million in fiscal 2015 ended March 31 on revenue of $71-million. Adjusted free cash flow for the year just ended was $17-million, up 21 per cent from the year before. The company recently launched a mobile music app for existing TV subscribers.
At a multiple of 12 times earnings, Stingray would be valued at roughly $330-million.
Stingray is currently owned by Mr. Boyko, Quebec private equity firm Novacap, and Telesystem, a media and technology holding company controlled by billionaire entrepreneur Charles Sirois and his family. Novacap will exit its position with the IPO as it comes to the end of its seven-year time horizon for the investment while Telesystem will sell off a portion of its stake. The rest of the share sale proceeds, representing roughly one-third of the total, will be used to pay down debt and for working capital and general corporate purposes, according to the filing.
Mr. Boyko will have voting control of the company through super-voting shares, a condition he insisted on in taking the company public, a source said.
While such a dual-class stock structure is typically frowned on by institutional shareholders, it also enables the founder to act in the long-term interests of the company without worrying about a takeover. Dual-class share structures have also been a prominent feature of recent technology IPOs from companies including Facebook and Shopify, indicating investors are willing to look past the shortcomings of becoming subordinate owners in order to buy into hot offerings.
In tandem with the public share sale, Mr. Boyko and a group of private investors will spend $18-million in a secondary private placement in order to buy multiple-voting shares now owned by Telesystem and Novacap. The pricing terms and valuation of the deal are the same as those of the IPO but also includes a two-year lockup period during which the investors enter into a voting trust agreement with Mr. Boyko.
With files from Sean Silcoff