In today’s issue, we’ll talk about a unique company that’ll hit the market soon. You’ve probably never heard of Authentic Brands Group ($AUTH) but you’re very familiar with its brands. It’s the owner of some of the most iconic brands in the world.
🧟♂️Turning zombie brands into cash flow machines
On its site, ABG describes itself as a “brand development, marketing, and entertainment company” but that doesn’t say much. It’s essentially a mega licensor, buying up the rights of dead brands and licensing out their intellectual property for a profit (smart business model as we’ll see). It was founded in 2010 by Jamie Salter a licensing pro.
Before ABG, Salter founded Lifestyle Brands, also a licensing company that sold for $85 million. He then started Hilco Consumer Capital, another licensing firm that purchased the rights to several struggling brands. In 2010, he left that company to start ABG which is now backed by BlackRock ($BLK) and has revenues of nearly $500 million.
ABG has acquired the rights to several dead brands like Forever21, Brooks Brothers and Barneys New York. It also owns the exclusive rights of Marilyn Monroe, Elvis Presley, Muhammad Ali, and Michael Jackson, who are among the highest-earning dead celebrities; their estates earned a combined $509 million in 2017. ABG as the licensor collects royalties between 4% and 6% of these sales. In 2020, the company’s portfolio brands generated approximately $10 billion in sales, and ABG earned $489 million in licensing revenue thanks to this lucrative model.💰
The good, the bad and the ugly
👍The good: ABG’s business model is fantastic. The company generates high margin licensing revenue from the rights to brands and celebrities it owns while its expenses are minimal. Its sole responsibility is to promote its brands. It doesn’t deal with manufacturing or inventory — it only focuses on marketing, promotion, and brand building. Thanks to this ultra light model ABG generates deep profits. In 2020 it reported an operating income of $302 million that translates into an operating margin of 62% — a uniquely high margin.
👎The bad: At its core, ABG is not a high-growth firm. The organic revenue growth of its brands was just 7.7% between 2016 and 2019. Yet, the company managed to grow at a compound annual growth rate of 31% between 2016 and 2020, thanks to acquisitions, its main growth strategy. Since its inception in 2010, it has acquired the licensing rights to more than 40 dead brands and celebrities. The pandemic was also a great opportunity for ABG; it acquired several big brands that went bankrupt such as the Brooks Brothers and Barneys New York.
😰The ugly: Growth via acquisitions is a risky strategy; the company needs to find more zombie companies with strong brand recognition at a good price; it’s a difficult equation. Also the brands it has acquired so far were low-hanging fruits. There are not many other Brooks Brothers’s or Forever21’s so it’ll now focus on smaller brands. If it doesn’t find enough target companies, growth rates will suffer.
A mixed bag
Authentic Brands is a unique company; it was founded only in 2010 and has already become the third largest licensor globally, based on 2019 retail sales. The largest licensor in the world is Disney ($DIS) 🏰, founded nearly a century ago. ABG’s rise to the top in just 11 years shows that the management and the veteran CEO know very well what they’re doing. Deep cash flows and experienced CEO will definitely attract investors’ attention.
Yet unlike Disney that creates and licenses its own original content, Authentic Brands relies on acquisitions; a riskier growth strategy. In other words, it presents a mixed bag for investors. We’ll discuss all the latest details in the Sunday Newsletter before its debut.
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