Reservoir Media has emerged as a significant entity in the music industry, operating a multifaceted business model that includes music publishing, recorded music, management, and rights management, particularly within the Middle East. By examining the company’s structure, financial performance, and market strategic positioning, a more comprehensive understanding of its future trajectory can be developed.
Reservoir’s operations are primarily divided into two segments: Music Publishing and Recorded Music. The Music Publishing segment focuses on acquiring music catalogs and signing songwriters to lucrative agreements, while the Recorded Music segment is involved in acquiring sound recording catalogs and discovering new artists. With a catalog that boasts some of the most iconic names in music history, including Joni Mitchell and John Denver, Reservoir manages an impressive portfolio of over 150,000 copyrights and 36,000 master recordings.
This breadth not only illustrates Reservoir’s expansive reach in the industry but also highlights its commitment to maintaining a stable repertoire of music that continues to capitalize on enduring popularity. The successful integration of its Music Publishing and Recorded Music segments has positioned Reservoir to benefit from the evolving trends of the music business—specifically, the significant revenue generation from streaming services.
Since its IPO in July 2021, which was facilitated through a merger with a special purpose acquisition company (SPAC), Reservoir has seen commendable growth. By the first quarter of 2021, the company’s gross profit rose dramatically, illustrating a nearly twofold increase year-over-year—from $47.39 million to $89.38 million. The reported earnings before interest, taxes, depreciation, and amortization (EBITDA) followed suit, jumping from $33.8 million to $54.4 million in the same period.
Despite these impressive financial indicators, Reservoir’s stock has faced challenges. After reaching heights during its SPAC debut, the company has seen a decline in share price—down by approximately 22% since going public. This drop in valuation raises important questions about the long-term sustainability of SPAC-driven firms in the current market environment.
In light of recent financial performance and stock valuation concerns, Irenic Capital recently disclosed their stake in Reservoir, owning 8.14% of shares at an average cost of $6.54. They have urged the company to conduct a strategic review and consider a potential sale, a move highlighting the growing trend of activist investors seeking to enhance shareholder value through strategic realignment. Irenic Capital’s appeals could force Reservoir to rethink its operational model, especially as the competitive landscape for music rights management continues to evolve.
One of the critical discussions during this review will focus on the underlying thesis of Reservoir’s valuation model, particularly post-SPAC. Initially, the SPAC-driven narrative suggested that Reservoir could leverage its shares to acquire complementary businesses at favorable valuations. However, the changing market dynamics indicate that Reservoir might be more effectively served through a sale, especially given its positioning as a “collector of royalties” rather than a traditional operating company.
Valuation metrics reveal that Reservoir is currently trading well below its potential comparative market value, at approximately 8-9 times net publisher’s share (NPS). Looking ahead, a strategic acquisition by a financial buyer who can pay above 15-times NPS represents a real opportunity for Reservoir. However, any potential transaction may need to navigate complex ownership dynamics, particularly concerning the Khosrowshahi family, which holds a significant stake in the company.
The ownership structure can be both an asset and a liability. While the stability and experience of CEO Golnar Khosrowshahi lend credibility, the familial ownership may deter aggressive buyout strategies. Learning from recent activities in the sector, like the acquisition of Hipgnosis by Blackstone for approximately 18-times NPS, Reservoir may need to present a robust case for its valuation despite current market skepticism.
Reservoir Media stands at a critical juncture. Although it faces some volatility in its stock price and must contend with the scrutiny from activist investors, its foundational business model and extensive portfolio of copyrighted music present significant growth opportunities. The company must leverage its strengths in music publishing and recorded music while deliberating necessary strategic shifts to enhance shareholder value. An open channel of communication with investors and the board is essential to navigate the complexities of the music industry while optimizing its financial positioning for future growth.