—We assumed that ticket revenue accounts for 40 percent of the combined company’s revenue. Ticket sales account for about 20 percent of Live Nation’s revenue and nearly all of Ticketmaster’s revenue, resulting in 40 percent for the combined company.  The remaining revenue streams are concessions sales and sponsorship at events.

—We assumed modest growth from concessions sales and sponsorships in 2010 (most analysts expect modest economic growth in 2010). With price increases driving most of the growth from concessions and sponsorship, revenue growth of between 5 percent and 7 percent in 2010 and 2011 isn’t unreasonable.

—We assumed 4 percent expense growth in 2010 and 2011 (once the company’s target of $40 million in cost cuts is realized), which, given that the company will probably be watching its expenses closely, is a reasonable estimate.

Then, we ran a number of scenarios with different ticket-price increases, looking at the incremental returns in each case. We measured those incremental returns in terms of changes to EBITDA margins. (Note: Some investors use earnings per share or free cash flow to measure incremental returns, but, based on my previous life as a media and entertainment analyst, EBITDA is in my mind a better reflection of a company’s operating efficiency.)

Live Nation Entertainment’s EBITDA margins are now about 7 percent. How to drive that number higher is the question:

—Ticket-price increases in the range of 2 percent to 8 percent generate margin improvement of between minus 0.8 percentage points and plus 1.3 percentage points. 

—Once ticket-price increases reach 10 percent, margins improve more than 2 percentage points, and, in the case of 15 percent price increases, 3.6 percentage points. That’s a material return if you’re starting at 7 percent margins.

The bottom line is that if the merger fails to create incremental returns for Live Nation Entertainment, consumers win but shareholders lose. If the merger does generate enough incremental returns, on the other hand, shareholders win and consumers lose. I’m putting my money behind the shareholders.

Photo Credit: Anirudh Koul