Wall Street missing the beat as live nation gets the blues.

Concert promoter Live Nation Inc.'s acquisition of the House of Blues nightclub chain will give the company more locations and greater ticket sales and revenues in 2007. So far, however, investors have greeted the deal with polite silence instead of applause.

In two days of trading following the first news of the Blues on July 5. the stock price for Los Angeles-based Live Nation declined 1 percent.

The underwhelming performance stands in contrast to Live Nation's tour de force for 2006. Its share price has risen 60 percent since January 6. Live Nation started trading on the New York Stock Exchange as an independent company just a week earlier, following its spin-off from radio broadcaster Clear Channel Communications Inc.

With the purchase of HOB Entertainment Inc., Live Nation paid $350 million to gain 10 House of Blues clubs and eight amphitheaters. The new venues have seating capacities between 1,000 and 2,300. Live Nation already controlled 153 venues worldwide.

"The acquisition will allow Live Nation to expand its presence in the growing mid-size venue business and fill in geographic gaps in its existing amphitheater network," according to a statement by the company.

Cautious outlook

Media analyst David Joyce of Miller Tabak Co. LLC called the acquisition a wise strategic move, giving Live Nation geographic diversity west of the Rockies to balance the company's major holdings farther east.

Despite the smart acquisition and the run-up in stock price this year, Joyce maintains a neutral rating on the stock. "Retail investors were excited by the prospect of a play that had artists' names that they were familiar with," he said, explaining the appreciation of Live Nation shares. "Sophisticated investors looked at the potential real estate value of the company because it owns a lot of real estate that hasn't come onto the market for a while. But the company has since scaled back expectations in that regard."

Joyce has a target price of $23 per share; the stock currently trades in the $20.80 range. The only other analyst who covers Live Nation, Louis Meyer of Wall Street Access, gives it a sell rating.

The cautious outlook by analysts stems from the declining fundamentals of the music industry. Total ticket sales for the 100 largest concert tours fell 4 percent in 2005. That follows decreases for the two previous years. according to music tracking service Pollstar.

At the same time, total revenues increased to a record $3.1 billion in 2005, thanks to higher ticket prices. The average concert ticket cost of $57 in 2005 was nearly 9 percent higher than the previous year. Since 2001, the average ticket price has jumped more than 40 percent.

Live Nation's future revenue gains depend on either further escalation of prices--a dubious assumption--or increases in market share. But with the acquisition of HOB a virtual certainly, the number of significant take-over targets for Live Nation approaches zero. Last year, Live Nation and House of Blues sold 29.0 million and 6.9 million tickets respectively, according to Pollstar, making them the number one and two players in the industry. The only other major concert promoter, Anshutz Entertainment Group Inc. of Los Angeles, sold 6.3 million tickets.

Little upside

A final fundamental of the industry is that concerts simply don't have the big upside potential that investors love in other branches of show business.

Live Nation "has been a company in transition," Joyce conceded, "but I still do not like the business model. It's a low-margin business, with about 5.5 percent EBITDA margins. So I think it's close to fully valued at this point." EBITDA stands for earnings before interest, taxes, depreciation and amortization.

Live Nation expects to consummate the acquisition by the end of 2006. and the HOB venues should contribute to the company's financial statements next year, giving investors a chance to finally hear the music for themselves.

A spokesman for Live Nation declined to comment.