Alluvial Substack

Investment Analysis Clubs Jim Royal
1

Dave Waters offers his free Substack newsletter, with some interesting ideas, in particular with this edition the banks who received ECIP funding and may not be able to repurchase those preferreds at ridiculously low prices.

Jim

2

I saw this guy mentioned music royalties, and I was intrigued.

I, too, occasionally peruse the royaltyexchange.com site…

The Listerine Royalty is an interesting one for sure.

The “Cage the Elephant” Life-of-Rights and also the rights to “Broken” by Lovely the Band are the things I check with the most interest.

I wish they’d let you filter on genres, though. As much as it makes sense that every royalty is just a financial instrument, every buyer only has a certain interest and familiarity with a limited number of genres.

Rather interesting how many hip-hop artists and producers seem to sell their futures for “cash now”… is that just Willie Dixon, Little Richard, etc. repeating itself, or are these people savvy, and don’t value the stuff they make for the long-term?

3

All of it seems overpriced, though.

4

Yeah, the royalties are interesting, but I think they’re overpriced, too, unless you have some specific insight into how it’s being managed and know it’s likely to grow, etc. I mean, it’s a pretty offbeat investment, but novelty doesn’t pay the bills. Still, it’s cool to see that this kind of thing is out there.

Jim

5

Best I can do is say “Cage the Elephant” is:

  • Not done. They released an album this spring with a song that gets radio airplay. (“Neon Pill”)
  • New albums cause sales and listens to older product from bands.
  • The catalog holds perpetual rights to “Ain’t No Rest for the Wicked” which is a song that I think will have legs for a long time; movies, TV, and videogames.

Gemini tells me:

The song “Ain’t No Rest for the Wicked” has appeared in several movies and TV shows, including:

  • The Bounty Hunter: (2010)
  • Lucifer: (Fox)
  • 13 Reasons Why: (Netflix)
  • Hawaii Five-0
  • Outer Banks: (2021)

The song has also been featured in the opening and closing sequences of the first Borderlands game, a commercial for Leverage, an episode of The Vampire Diaries, and an episode of Jersey Shore. It was also the opening song for the Canadian reality show Yukon Gold and was performed on The Late Show with David Letterman.

6

I have a question on this: If you were looking at a royalty investment, would you use the same hurdle rate you’d use for a public equity investment? I usually throw something between 10 and 11% into any DCF I throw together, but if one were looking at a “Listerine Royalty” e.g. would there be reasoning to set a lower rate or a higher rate?

7

I generally think that if I’m getting paid 7% on a royalty then I want to see 3% growth in the cash flow to get me to a 10% annualized return. I realize that’s not the same thing as an un-taxed 10% compounded because taxable cash is distributed and not implicitly reinvested, etc.

Anyway, I would also want to be very comfortable that this kind of royalty was not going to fall off a cliff. What is the cost to get liquidity if you want it?

Jim

8

Well, I keep coming back to the Listerine Royalty because it is so interesting, right?

  • 143 years and still going.
  • Seemingly “inflation protected” by the retail price of Listerine
  • As a brand, it is unlikely to go away because the brand has a value to whatever company owns the rights to make it.
  • Conversely, it reads like the Listerine Royalty is based on use of the original formula, and not the name, so if an ingredient were banned worldwide from the original could the entire royalty “evaporate”?

We both said the stuff on royaltyexchange.com looks overpriced, and I still do.

But “how much” overpriced is this one, and can it be discerned the amount of overpriced-ness increases as the size of the royalty decreases?

Because there are different sized fractions of the Listerine Royalty, and so can one “break bulk” on a larger royalty and sell it in smaller units?

9

That would be an interesting strategy to “unbundle” pieces of that royalty and see if you could sell them at higher prices. As you saw, there are two others for sale at 25.6 and 22.6 times royalties – not very attractive multiples for what looks like a stagnant payout. I’d be curious if they have previous transactions on this here, or if these are the same chunks that have been on sale here forever.

Anyway, one could buy the larger royalty and then sell $100k chunks at a higher multiple, maybe.

Jim