IPO May Leave Investors Singing the Blues, Some Analysts Say

Investors in HOB Entertainment, which plans to raise as much as $100 million in an initial public offering in May, may eventually find themselves living in their own House of Blues if the company known for its hip music venues fails in its efforts to transform itself into a successful “dot-com.”

Despite the Nasdaq free fall on April 14, House of Blues still plans to go ahead with its IPO, although several other companies have postponed, pulled or scaled back their offerings in recent days, wary of the rough market for new offerings.

HOB is much more than its nationwide chain of seven House of Blues clubs, including the one on the Sunset Strip. It’s the world’s second-largest operator of amphitheater, theater and arena concert venues, thanks to the 20 sites it bought from Seagram Co. for $190 million last year.

Revenue has risen an average of 143% annually over the last three years, according to federal filings, but House of Blues has yet to return a profit as it plows its cash into an effort to morph itself into an Internet company offering live pay-per-view shows of everyone from Britney Spears to Billy Bragg.

Indeed, the Hollywood-based company founded eight years ago in Texas has operated much like an Internet start-up, posting losses every year. The company lost $18.9 million in 1997, $10.4 million in 1998 and $15.8 million last year and currently has a cumulative deficit of $124 million, according to federal filings.

Still, the potential for HOB to be a lucrative live entertainment company both in theaters and on the Web attracted top-notch underwriter Goldman Sachs & Co., which has seen its IPOs this year rise 17.3% from offer price, versus a 0.4% decline for new stocks overall, according to data tracker CommScan.

But analysts say investors could be the ones singing the blues with this deal.

“We didn’t like this one much,” said David Menlow, president of IPO Financial, a New Jersey data firm. “The Street is going to want to see some real numbers, some profits on this one. Otherwise, is it just a Web site? With the rise and fall of the music sector in the IPO market, you’d have to wonder, ‘Why is Goldman involved?’ ”

Indeed, the music sector and Wall Street haven’t been in tune as of late. Stocks such as MP3.com Inc., a San Diego-based digital music company, and Redwood City, Calif.-based Liquid Audio Inc. are way down for the year.

HOB’s biggest competitor, SFX Entertainment, the nation’s No. 1 producer of entertainment events, in March agreed to be bought by radio station giant Clear Channel Communications Inc. for $3 billion. Though SFX stock rose slightly on news of the deal and now trades at $36.88 on the New York Stock Exchange, it remains far off its peak of $51.63 last summer.

HOB hopes to capitalize on the music it offers at its venues by distributing it online. Consumer demand for pay-per-view concert Webcasts is still virtually nonexistent, but the company hopes it will increase along with the public’s use of the Web. The company is also betting that major record companies will increasingly see House of Blues as a way to supplement marketing efforts, since it will be able to cross-promote more of its acts in clubs and on the Net.

One issue may be whether the company can archive live concerts for rebroadcast on the Internet, which could be key to the success of HOB’s online division. To broadcast a live concert, House of Blues usually needs just the artist’s permission, but for rebroadcasts it needs permission from the artist’s record label. House of Blues figures it could charge more for early concerts by virtually unknown bands that later achieve wide followings, for example rebroadcasts of an early REM show supporting its first full album, “Murmur.”

House of Blues would need to negotiate revenue-sharing deals with record labels in order to re-air concerts on the Web.

“It remains to be seen whether they can tune up a business that will be pleasing to investors,” said Gail Bronson, analyst with IPO Monitor, a data firm in Calabasas. “You can have the greatest business on the Web and still not make money on it. They are going to have to build an audience, and if you are a real music aficionado, do you really want to hear it over your computer, unless you’ve really souped up your sound card.”

The company did not return phone calls seeking comment. It is in the “quiet period” imposed by the Securities and Exchange Commission before and after any public offering.

HOB is not without its share of controversy.

In November, a ticket-scalping scandal erupted after a Backstreet Boys concert at the Pepsi Center in Denver. Hundreds of prime tickets controlled directly by the show’s promoter, House of Blues’ concert division, ended up in the hands of brokers who resold them to fans for about 10 times their face value. House of Blues denied that it had any involvement in the ticket scalping, but the company donated money to a Denver charity at the Backstreet Boys’ request and said it has taken steps to prevent any recurrence of scalping.

In December, Pearl Jam vowed not to work with the concert promoter on its 2000 tour because of scalping allegations.

Despite its name, HOB offers much more than blues, with shows featuring everything from hard rock to hip-hop to country and western.

The company’s ambitious plans include 30 more House of Blues clubs and at least five more amphitheaters nationwide in the next five years. Despite the hurdles, some analysts are hopeful about the firm’s Internet chances.

“Theoretically, it’s a great idea,” said Daniel Davila of New Orleans-based Southcoast Capital. “You exploit the greatest distribution system ever made--the Internet--with a content you can’t go down the street and get.”

Davila, who said he goes to his local House of Blues regularly, predicted that acts like the Backstreet Boys will be big hits on the Internet.

The first House of Blues club opened in Cambridge, Mass., in 1992.

The company was started by Isaac Tigrett, who co-founded the Hard Rock Cafe chain. House of Blues pioneered one of the first live Web broadcasts in 1995.

Tigrett was ousted in 1997 due in part to the board’s concerns about the company’s financial performance. Greg Trojan, former chief executive of the California Pizza Kitchen chain, then joined the company as CEO.

After the offering, HOB will trade under the symbol HOBE on Nasdaq. Management owns a nearly 78% stake in the company before the deal, and celebrity shareholders include Dan Aykroyd, who owned 2.5% before the offering.

Venture capital investors in the company include Chase Capital, J.H. Whitney & Co. and Silver Ventures.

Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.