IS NIGERIA’S MAVIN RECORDS ABOUT TO SECURE MORE OUTSIDE INVESTMENT?

Brief analysis of a leading Nigerian music company's valuation

Mavin Records Nigeria (MRN) is one of Nigeria and Africa’s leading music companies. Home to a roster of almost ten acts, with over 2 billion cumulative streams of the company’s catalogue, and (what — pre-pandemic — was) a positive live performance business segment, MRN, by any metrics, presented a strong investment value proposition.

This is why it made business sense when, early in 2019, it was widely reported that Mavin had secured equity investment from international institutional investors. Finally, after all the hype and excitement about “Afrobeats” and how it’s been taking the world by storm, we now had a “price” on it (so to speak) — with one of the biggest local players now having a valuation.

Naturally, the terms of the deal remain confidential but given the usual structure of such investment rounds by foreign investors, opportunities to get some data points that could help in generating good estimates are available.

As reported at the time, Kupanda Capital (an Africa-focused venture capital firm) and TPG Growth (the renowned mid-cap growth and buy-out private equity firm) jointly made the investment. Again, foreign investors making investments in target companies based in developing countries like Nigeria usually structure them through an offshore-registered holding company which becomes the parent company to the on-shore (Nigerian) operating company.

The Mavin deal was no different. Mavin Global Holdings Ltd (MGHL) is a UK registered company that is the offshore parent to, and that likely wholly owns, MRN. Being a UK company, MGHL’s filings are accessible online at the UK Companies House website; and the new ownership structure of MRN can be seen in MGHL’s cap table. From a review of all MGHL’s filings it is possible, with some underlying assumptions, to estimate Mavin’s valuation for the deal, and its possible current valuation.

MAVIN’S PRIOR VALUATION

According to Companies House filings, Kupanda + TPG (“Kupanda MGH”) own 46% of MGHL’s shares, Don Jazzy owns 34%, and 20% is unallotted (likely reserved for investors in subsequent funding rounds and possibly an employee share option pool). The total investment commitment was $3.76m and it almost certainly represented a Series A funding round. Series A rounds are usually minority investments with the amount of equity relinquished by founders generally ranging from 15% — 20%. In this case Kupanda MGH owns more than double that amount in MRN’s parent company. This premium can possibly be explained by the potential sector, market/territory, and currency risks associated with the investment.

So, based on the funding amount and Kupanda MGH’s shareholding of MGHL, MRN was likely priced at a post-money valuation of $8.2m, which would mean a pre-money valuation of almost $4.5m — with a cool $1m+ as a nice cherry on the cake for Don Jazzy personally. Naturally, the investors will be looking to bring more than just cash to the table and actually help the MRN team drive real value from the investment. TPG’s portfolio includes entertainment related ventures such as STX CAA & Spotify. Its wealth of experience in maximising such investments, as well as its robust network of contacts, should prove valuable to MRN in its international expansion plans — including its hunt for greater streaming revenues, more music synch opportunities and wider strategic brand partnerships.

Assuming the valuation was, as is the usual case, based on a multiple of MRN’s operating income in the preceding financial year to the investment, it’s possible to estimate that in 2018 MRN made anything from $500k to $800k. The bulk of that income would probably have come from live performances, endorsements and sponsorships, with recorded music revenues (streaming, downloads, CRT/CRBTs, synch, physical sales) likely accounting for no more than around 30%, in line with historic local industry trends.

With the valuation likely being based on a multiple of its operating profits — including the bulk coming from non-recorded music sources — MRN’s valuation was probably driven by live performance revenues which, due to the pandemic, dried up almost immediately after the investment was made.

WHAT MAVIN COULD BE WORTH NOW

Institutional private equity investors (such as TPG Growth) usually look for returns of 5–10x or better on their investments, depending on the stage of the company’s growth cycle at the time the investment is made; and within, or by the end of, a 5–7 year period. Based on these assumptions, and factoring in (pre-pandemic) estimated growth rates for the Nigerian music industry, MRN’s value today — in order to meet investor return expectations — should be between $13m and $15m.

However, with the loss of its live performance income — and presuming that it accounted for 60% of the $500 — $800k total income it was previously generating — MRN would likely have suffered a potential $300k — $480k hit to it’s revenues in 2020. One can imagine that this occurred shortly after MRN had already deployed the bulk of Kupanda MGH’s investment — likely based on a strategy designed around revenue growth from that particular business segment. Significant funds have definitely been deployed in globally marketing and promoting REMA — MRN’s flagship act — over the 18 months after the investment. Add capital expenditures in MRN’s state-of-the-art Lagos offices/studios, staffing, investing in new acts and other costs of expanding its operations, it quickly becomes clear that most of the investment has probably been put to use already.

All the resources deployed would have to be reconfigured to focus on generating revenues and returns primarily through brand partnerships, recordings, livestream performances and other paid digital channels (e.g. NFTs and Gaming). This would mean a stronger focus on streaming, publishing, synch opportunities and, of course, high value generating international endorsements, sponsorships and digital partnerships.

MRN may require another $5m — $10m (most likely at a valuation in the range of $25m — $50m or better) to truly realise its vision of being Africa’s biggest music company. A key part of this is to harness (what are generally more lucrative) international opportunities, which increasingly revolve around technology-driven innovations. This would require MRN to actively keep abreast of all current developments in the music technology space and quickly develop creative strategies on how to generate value from them. Enterprise licences for key technologies may be required (or bespoke systems developed) to enable the label be more globally competitive. Furthermore, additional marketing costs (both for Rema and other acts) will equally require more funding to be raised.

CONCLUSION

Whilst, Don Jazzy may no longer control MRN through his shareholdings, he likely still has final say on most creative decisions and strategies that he and Tega Oghenejobo, his able deputy, develop and decide to implement. Both are Directors on MGHL’s Board as well as continuing as executive officers of MRN. It is nonetheless inevitable that MRN will require another injection of funding in order to enhance the value of its recording assets and maximize the brand equity of its acts in the digital realm. This will likely involve some strategic partnerships with international publishers/administrators and digital marketing agencies, as well as creative exploitation of alternative digital outlets for its catalogue. All of which will continue to be of significant value even when live performances fully return, post-pandemic.

The catch is that in order to avoid any subsequent funding round being a ‘down round’ (i.e. a round where the MRN’s value is less than its value in its preceding funding round) MRN must continue to somehow generate enough value (and growth prospects) to justify a higher valuation. This is at a time when the company arguably needs a further cash injection to achieve this goal. Worthy of note is that Douglas Alexander, a former head of the UK DFID, joined MGHL’s Board earlier this year, which may be another indication of a new fund raise on the horizon for MRN.

Whatever happens with MRN going forward, the company reached an important milestone in securing the Kupanda investment. If nothing else, it set a watershed precedent of direct foreign (institutional) investment in the Nigerian music sector. This should provide the necessary confidence for other investors to also take the required leap of faith. Additionally, the deal provides important comparable company data for valuations of other Nigerian music companies.

It’s an important time for the Nigerian music industry, with global markets now open to music, film and other aspects of the country’s pop culture. Leading businesses in the local industry are increasingly formalising their operations, improving governance practices, and better-protecting their copyright assets. All of these bode well for more investment stories in the industry especially given the much publicised local and international market growth projections for the sector.

In the meantime, be on the lookout for announcements of further funding for Mavin Records in the not too distant future.