The maker of the popular Beats by Dr. Dre headphones is looking to buy out its Asian partner and bring in a new investor that can provide it with fresh funds for growth; HTC’s shares have lost nearly 90% of their value since April 2011, when HTC was second only to Apple in U.S. smartphone sales

Updated August 18, 2013, 6:50 p.m. ET

Beats By Dre Looks to Drop HTC

Headphones Maker Is in Talks With Investor for Debt Financing, Minority Stake



Luke Wood, left, the president of Beats Electronics, with co-founders Jimmy Iovine and Dr. Dre in 2012.

The maker of the popular Beats by Dr. Dre headphones is looking to buy out its Asian partner and bring in a new investor that can provide it with fresh funds for growth, people familiar with the matter said. The moves come as the founders of Beats Electronics LLC—music mogul Jimmy Iovine and American hip-hop producer and artist Andre Young, better known as Dr. Dre—are broadening the company’s business from headphones to include speakers, audio systems in cars and consumer electronics and a soon-to-be-launched online streaming music service. It also comes only a couple of months after the company shelved a separate deal that would have raised hundreds of millions of dollars in cash for acquisitions and investments, as well as allowing the founders to be paid a dividend without giving up their controlling interest in Beats Electronics.

The fledgling audio-products company is now in talks with an investor that could provide debt financing and possibly take a minority ownership stake in the coming weeks, the people familiar with the matter said. Beats also hopes to buy out struggling Taiwanese smartphone maker HTC Corp.’s 2498.TW +1.62%25% stake in the company.

Beats officials declined to disclose details of the upcoming investment, including the identity of the new investor. An HTC spokeswoman wouldn’t comment on whether HTC plans to sell its stake in Beats.

Beats has notched explosive growth under CEO Mr. Iovine, known in the music industry as one of its most skillful wheeler-dealers, who with Dr. Dre controls about 75% of the company. Beats’ revenue shot up to roughly $1 billion last year from less than $200 million in 2010, according to people familiar with the matter.

Beats sold its first pair of headphones in 2008 for $350 apiece. The Santa Monica, Calif., company rode the growth of smartphones and tablets and popularized premium headphones partly by making them a fashion statement and partly by touting their sound quality as superior to that of the tiny white “earbuds” that have long been a hallmark of Apple Inc.’s AAPL +0.89% iPod and iPhone lines.

By this June, Beats had captured 59% of the U.S. market for premium headphones, according to NPD Group. That market, which includes all headphones and earphones costing at least $99, increased by 18% last year, according to NPD. But NPD consumer-technology analyst Ben Arnold said its growth will slow, and a challenge for Beats will be establishing itself as an audio brand beyond headphones.

Earlier this summer, Beats unsuccessfully tried to raise $700 million from the credit markets to refinance debt and buy out HTC’s stake. In June, Mr. Iovine pitched the deal at a concert-like presentation to debt investors at a hotel in midtown Manhattan, where the company passed out free headphones and played loud music, according to some attendees.

Investors found the company’s recent growth impressive, but a few questioned whether its success in the headphone market was merely trendy or something that could be sustained or replicated in other areas.

They also were concerned by the aggressive terms Beats was seeking, including a structure that would place few restrictive covenants on the junk-rated company and whether a large portion of the money raised could be used to pay a dividend to its owners.

A few weeks later, Beats and its bankers reworked the debt offering to make it smaller, to pay higher interest rates and to limit the proceeds that could go to shareholders to $150 million. Concerns about the Federal Reserve’s interest-rate policies roiled the markets in June, however, and Beats like two dozen other companies withdrew its offering.

Market conditions have since recovered and the company may again try to tap investors in the fall, a person familiar with the matter says.

Mr. Iovine co-founded Interscope Records in 1990, sold a 50% stake in the company for $200 million to MCA Records, which was eventually absorbed by what is nowVivendi SA’s VIV.FR +0.65% Universal Music Group and now owns all of Intersope.

Despite Beats and other sidelines, including a role on “American Idol,” Mr. Iovine, 60 years old, remains chairman of Interscope Geffen A&M records and one of the most prominent executives in the music industry.

Universal Music took a minority stake in Beats partly on the theory that it would align the record company’s financial interests with Mr. Iovine’s moonlighting gig.

Two years ago, Mr. Iovine and Dr. Dre sold a 50.1% stake in Beats Electronics to HTC for around $300 million, to only a year later buy half of that back for around $150 million—a discount given Beats’ substantial growth in the intervening months.

HTC incorporated audio software from Beats into a line of phones, and other phones were bundled with Beats headphones. HTC last year also provided Beats with a one-year, $225 million loan that was secured by all of Beats’ assets, according to HTC’s annual report.

That loan was recently replaced with an interim loan that is due in July 2014, according to an early August report from credit ratings firm Standard & Poor’s, which said Beats still needs to develop “a viable refinancing plan” in the coming months.

HTC’s fortunes faded amid tougher competition in the smartphone market from companies like Samsung Electronics Co. 005930.SE -0.85% HTC’s shares have lost nearly 90% of their value since April 2011, when HTC was second only to Apple in U.S. smartphone sales.

While HTC originally saw Beats as a way to court the youth market, the collaboration ended up souring with differences in opinion on strategy, said a person with knowledge of the partnership.

Earlier this year, Beats approached HTC about selling its remaining stake, according to a person familiar with the matter.

If Beats successfully expands its electronics business beyond headphones, it will further validate a widely quoted exhortation Mr. Iovine gave Dr. Dre when the rap star was deciding between signing a footwear endorsement deal or starting Beats: “F— sneakers, let’s make speakers.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: