INTRODUCTION
We’re a couple of days late on this, but our industry insider Ken Uston offers a deeper expert view on the news that Pioneer DJ is for sale. He offers clarity on what the news actual is and isn’t, as well as what it means, and importantly doesn’t.
A couple of days back, a story about “Pioneer exiting the DJ business” appeared in the social channels. This started a chain reaction, where a number of good outlets published completely incorrect stories, repeating this information in an effort to be first to the starting line. While Mixmag was apparently embarrassed enough that they completely wiped their story from their site and others, such as (the typically on the ball) Resident Advisor changed their posts to reflect the facts, the damage has been done. Social media has been on fire, rumors have been flying, and all in all things were just a mess.
Let’s break things down why the story is wrong, what is (probably) happening, and other interesting facts:
1. Pioneer DJ is most likely staying in the DJ business.
This should be a given but let’s examine the facts. Firstly, it’s important to clarify the difference between Pioneer and Pioneer DJ. Pioneer is the Pioneer Corporation — the umbrella for the assorted Pioneer branded companies across many different industries. Pioneer DJ is the brand that VC company KKR took an 85% stake in, leaving 15% with Pioneer.
This announcement is about Pioneer selling their 15% stake of Pioneer DJ, and at the same time KKR is looking for a buyer for their 85% stake too. So the various stories floating around should more accurately state that Pioneer DJ actually IS for sale, which is the real talking point. Now we have that sorted…
Pioneer owns about 60% of the DJ market. Name a category; they have their hands in it. While Pioneer DJ has some value outside of its immediate product line (patents, employees, potentially real estate), the value of these holdings is not worth anywhere near the reportedly 60-70b yen ($550-650 million USD) asking price. The fact is that, while we all would love to believe that the DJ industry is huge, the only value in Pioneer is their current business of DJ product, not their IP or even their brand name. While it isn’t unheard of for a company to be bought to take a player off the board, the asking price is far too expensive for this to even be a remote possibility. Pioneer DJ is very good at making money and their only value is in continuing to be a successful DJ equipment company.
For what it is worth, Pioneer actually exited the DJ industry five years ago. Pioneer Corporation spun out Pioneer DJ five years ago and is only selling their last remaining 15% stake. This was always in the cards and right now they need the capitol more than they need a stake in a company that only shares a brand name.
2. This happened almost EXACTLY when we would have expected.
Take Pioneer Corp. (the old parent company) out of the equation for a moment, as while they are also selling their stake, their business decisions/need for capitol are not the main trigger. They could have done this a year ago or ten years from now and it wouldn’t effect how much of a stake KKR would keep.
Private equity firms, when managed properly, have incredibly predictable ownership numbers. They calculate value (typically 5x earnings before taxes, depreciation of assets, etc), buy a stake, sit on it for 3-5 years, and depending on the company, make anywhere between 8-25% return on their investment. The current exchange rate of the yen is almost exactly what it was 5 years ago and if sold for 70b yen, would yield a return of 18% (covering Pioneer Corp’s stake and making a profit).
It may be easy to ask why they don’t just sit on the company for longer but here is the thing: private equity firms are not banks. Like any other company, they borrow money to fund their acquisitions. Often times, when taking out these loans, the interest rate can change pending certain year milestones. If they don’t pay back their loans by their predicted date, the financial terms can be brutal.
The best recent example in our industry is Guitar Center. While they have been making money fairly consistently over the years, due to their buyout in 2007 crossing over with the financial crash of 2008, Bain sat on their investment for over ten years. This lead to huge losses that were the result of incredibly large balloon interest payments and couldn’t possibly be covered by anything but impossible sales growth. Point being, Pioneer DJ being sold at the five year mark basically means that, at the very least, KKR did their job with minimal losses and likely a profit.
3. The next buyer will (most likely) not be in the DJ industry.
I can hear the peanut gallery now saying that the buyer will be inMusic, Music Group, or one of the other usual suspects. The trouble is, however, that it would make very little fiscal sense. Much like when you go to the bank for a home loan, the bank wants to know both that what you are purchasing will be a sound investment and should you default, they can get back their money by going after your current assets. The music equipment industry is quite volatile and neither company would have the assets or sales to cover a default. Should there be another market crash or major shift in consumer taste, a default could easily happen. Neither most banks nor MI companies would likely want to take such a risk. One only has to look at Gibson’s recent woes as a perfect example, having overly leveraged themselves in large consumer electronics company purchases that didn’t pan out, resulting in bankruptcy (being purchased by KKR in the process.)
Companies like inMusic and Music Group make purchases based on a low price/high value assessment. Rane, Denon, TC Electronic, etc, these were troubled companies with a good name and market penetration in areas where they wanted to go. Neither company has ever made a purchase anywhere near this value, nor will they likely ever.
If I were running Vegas odds, the next owner will likely be another private equity firm, with long odds on a company like Samsung looking to build their portfolio around other audio holdings (Harman in this case). Which leads to the next point…
4. Everything is going to be OK.
While many company purchases have led to consumer trust being damaged (warranty, support, etc), the next buyer is very likely to be hands off. The proprietary and highly specific tech that Pioneer uses, the current success of the company, and current management are factors that mean Pioneer DJ will likely remain relatively untouched. If you buy an XDJ-1000mk2 or DDJ-800 tomorrow your warranty will be honored and the tech support person you speak to will likely be the same in six months.
FACTS ARE IMPORTANT
This is the most infuriating aspect of this whole story: the alarmist clickbait that sounds great as a headline but is so far from the truth that it might as well be a story from The Sun or Breitbart. It is the definition of fake news, with a minimal amount of fact checking needed to have come to the right conclusion. Digital DJ Tips and DJ TechTools actually did the legwork and should be commended for it.
DJ journalism isn’t rocket surgery but it is important. To the average DJ, it does mean something. So, dear reader, make sure to ask more from your favorite sites and keep a level head when the current fake news industry bleeds over to our little corner of the web. All we have is the truth and that is what we all owe you.