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PrivCo: APPLE Acquires BEATS Electronics for "Unjustifiable" Valuation: The True Financial Story of BEATS Electronics: Was Debt-Heavy, Low-Margin, "Distressed Asset"

NEW YORK, NY -- (Marketwired) -- 05/29/14 -- Apple is acquiring Beats Electronics for $3.0 billion in cash and stock, Apple confirmed today. Apple will pay $2.6 billion in cash and $400 million via 650,000 shares of Apple stock for the audio electronics and most recently nascent streaming music company. PrivCo's analysis of privately-held Beats' financials shows:

  • Despite Beats' rapid top-line revenue growth, true growth has slowed markedly, and recent "revenue growth" was primarily due to a material accounting change where Beats shifted from being a royalty-check recipient to taking product inventory itself
  • Beats, since its revenue model change beginning in 2012, has become a low-margin electronics business, underperforming its peers on every key financial and operating metric (from gross and net margins to inventory turns)
  • The new Beats-as-manufacturer has gone from high margin brand licensing business, to a consumer electronics maker with below-industry-average, single-digit, profit margins
  • The transformed Beats requires massive cash to fund inventories, advances to suppliers, growing receivables, and distribution and warranty costs, leaving the company materially in debt (and was days from insolvency less than a year ago)
  • Beats has little value as a streaming music service (which is technically separate from Beats, although Apple is buying both businesses), and its value to Apple lies primarily in the possibility of Beats easing Apple's entry into the "Living Room" by enhancing AppleTV, and in wearables by making headphones (rather than watches) -- already worn by young consumers -- as the basis for Apple's wearable tech strategy.
  • Dr. Dre -- due to millions in dividends paid to himself from Beats with borrowed money several months ago -- will become the "First Hip Hop Billionaire"
  • Despite some benefits to Apple, Cupertino is substantially overpaying for Beats Electronics with a premium valuation that no rational comparable can justify.
    PRIVCO'S FAIR VALUE OF BEATS: $1.122 billion
    Less DEBT: $300M
    EQUITY VALUE: $822 million
  • "CEOs Can Be Star-Struck. But They Can't Be Blind."

"Beats took its manufacturing in-house in 2012, turning Beats into a low-margin electronics maker. After buying back HTC's stake in the company with $265 million in borrowed money due within 12 months, Beats Electronics was a distressed business by 2013 by any standard. New lenders were balking at Beats' plan to borrow more money to not just pay off its looming debts, but to pay Dre and Iovine a quarter-billion dividend to boot. The company was in a corner until Carlyle stepped in. And now Apple's coming to the rescue as Dre's and Beats' final savior." Sam Hamadeh says, "As for the King's Ransom Apple is paying, no traditional valuation measure applied to Beats as a business justifies the price. Although even CEOs become star-struck, they shouldn't ever become blind. We must assume Apple and Tim Cook have grand plans to which we're not privy."

To access full analysis and press statement with graphics:

About PrivCo
Based in New York, PrivCo is the leading provider of private company financial data and business research, with exclusive financial data on over 418,339 private companies.

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Media Contact:
Sam Hamadeh
PrivCo Founder & CEO
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