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Risks at SFX Entertainment? Plenty That Have Nothing to Do With Entertainment.

Also, CHS' tangled web.

Wednesday wallop:

Encore, encore:

That's what Wall Street is banking on from Robert Sillerman, the genius behind

SFX Broadcasting

, and his

SFX Entertainment


. In a mere two years, through dozens of acquisitions and alliances with some of the biggest names in show biz, SFX has become the country's largest concert promoter and operator of music venues, the largest developer and manager of touring Broadway shows and the largest producer and promoter of specialized motor sports events. It's also well on its way to becoming the largest producer and promoter of family-oriented entertainment shows.

In other words, SFX Entertainment is hoping to do to the live entertainment industry what SFX Broadcasting, which was sold at a hefty profit to

Capstar Broadcasting

, did to radio stations. There are plenty of critics of Sillerman's latest venture, but so far those who have bet against him have probably wished they hadn't. (Just ask all those short-sellers who covered, after taking big losses, earlier this year.)

Still, critics abound inside and outside the entertainment biz. One of their biggest gripes: They say the economics of the biz, SFX style, simply don't make sense. SFX, for example, pays top dollar -- often overpaying -- to snare acts in what has become a low-margin, no-growth biz. And while the number of mega-seat venues has increased over the past decade, the number of touring acts has fallen by roughly half, according to industry insiders. What's more, "This isn't radio," says a report from David Tice's

Behind the Numbers

research service. "One of the major flaws in the SFX strategy is that the company has almost no control over its largest revenue stream," Tice's report says. "Since it doesn't own the talent, it cannot dictate when these bands or shows tour."

But SFX CEO Michael Ferrel dismisses the criticism and counters that while the economics of the biz may not make sense from a traditional earnings standpoint, it makes perfect sense when viewed on earnings before interest, taxes, depreciation and amortization.

And that brings us to the real point of this item: Even without the industry-related issues, red flags would be flying high over SFX for other reasons, starting with the company's focus on EBITDA. Whenever a company tells you it's "an EBITDA story," watch out. EBITDA is defined differently by different companies. SFX says as much in its recent

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filings for a secondary offering. It's often a convenient way to draw investor attention away from the real story: good old-fashioned earnings. In the end, when all of the acquisitions end, SFX will be judged on its earnings.

Red flag No. 2: acquisitions. No matter what biz it may be in, SFX is a rollup, and rollups tend to be growth stories as long as they're rolling up (or acquiring) new companies. Once the rollups stop, so usually does the growth. The lead risk factor, in SFX's recent prospectus, is that "if we are unable to complete pending or future acquisitions, our stock price may suffer."

Red flag No. 3: The pressure to make acquisitions for the sake of acquisitions can lead to costly mistakes. Just ask

Family Golf Centers


; one bad acquisition almost did


company in.

Red flag No. 4: debt, and SFX has lots of it -- $1.4 billion as of June 30. And there's no sign of it going down. SFX itself warns of debt as a risk in its prospectus. In fact, the company recently lined up another credit line of $1.1 billion to help finance pending and future acquisitions.

Finally, red flag No. 5 (one of my favorites): too many underwriters. This column has always chided companies for having any more than three; in the last revision of its prospectus SFX had six -- count 'em,


! That many underwriters, especially at a company expected to generate lots of investment banking biz, not only guarantees that the new stock will find buyers, but pretty much guarantees positive analyst comments from Wall Street.

CKE Restaurants


was a classic: It had five underwriters on its last deal. Despite numerous concerns raised by short-sellers about the company's fundamentals, it received glowing recommendations from analysts


they finally realized that it couldn't cook up the profits it promised.

It's too early to say whether the same will be true with SFX. Unfortunately for investors, nobody will know until the final curtain falls.

Oh, what a tangled web:

In an earlier episode of the thickening plot of



, an item

here suggested that CHS CEO Claudio Osorio was betting against CHS' stock when it was much higher, by buying puts and selling calls on CHS' stock as a so-called collar. He was doing this through another company he controls called


, whose main asset is 7.5 million shares of CHS, which does all its business overseas. Osorio insisted the move wasn't a bet against CHS, which loaned $20.7 million to Comtrad, but a way to protect the value of CHS shares owed to individuals who sold their companies to CHS. (A mouthful, I know, but keep reading.)

Fast forward to last quarter's 10-Q, filed last month: Comtrad, which also was on the hook for $10 mil to a bank, couldn't pay its loan back to CHS, and CHS' shares had fallen too much to cover the amount owed, so CHS wrote off the loan.

Fast forward again, this time to last week, when Comtrad filed to sell 2.5 million shares of CHS stock worth around $10 million at the time. A bet against the future of CHS or a liquidation to pay off the bank? CHS officials couldn't be reached. Still, this much is for sure, according to one industry observer, who is short CHS stock: If CHS' financial condition does worsen, a clear benefactor would be

Tech Data

(TECD) - Get Tech Data Corporation Report

, which warned last week that its biz is hurting because of price-cutting in Europe. Tech Data didn't name names, but on a conference call it said that one of its European competitors was in jeopardy of losing product supply because of its financial condition. Can't imagine who that might be.

Herb Greenberg writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.