By Philip Elmer-DeWitt
May 30, 2014

When word spread that Apple was preparing to spend $3 billion to buy Dr. Dre and Jimmy Iovine’s headset and music streaming businesses, a lot of smart people took a look at Beats’ financials and scratched their heads.

But nobody published as detailed — or as nasty — a look at Apple’s (AAPL) newest acquisition as the one Sam Hamadeh’s PrivCo posted on Thursday.

PrivCo, which tracks privately owned companies, covers the stuff we already knew about Beats, including:

— Its ill-fated sale to HTC that even Iovine describes as a “culture clash” that “crashed and burned”

— Its $500 million rescue last October by a leveraged buyout team at the Carlyle Group

— The $205 million in dividends that Dr. Dre and Iovine each pocketed shortly afterward

But PrivCo also adds details from “thousands of pages of documents” it claims to have in hand, including Beats’ unpublished income and balance sheets and the terms of various loan, merchandising and royalty agreements dating back to 2006.

According to PrivCo, Beats in June 2013 was only days away from default on hundreds of millions of dollars of debt, and was saved from bankruptcy with a short-term, high-interest note, due next month that was secured by the rights to all Beats assets, trademarks and equity.

The report is unsigned, except for a summary quote from PrivCo founder and sometime movie producer Sam Hamadeh:

“After Beats took its manufacturing in-house in 2012 — turning Beats into a low-margin electronics maker — while at the same time buying back HTC’s stake in the company with $265 Million in borrowed money due within 12 months, by 2013 Beats Electronics was a distressed business by any standard. New lenders were balking at Beats’ plan to borrow more money to not just pay off its looming debts, but to pay Dre and Iovine a quarter-billion dividend to boot. The company was in a corner until Carlyle stepped in. And now Apple coming to the rescue as Dre’s and Beats’ final savior.

“As for the king’s ransom Apple is paying, no traditional valuation measure applied to Beats as a business justifies the price. Although even CEOs become star-struck, they shouldn’t ever become blind. We must assume Apple and Tim Cook have grand plans to which we’re not privy to.”

I’m not familiar with Hamadeh’s work at PrivCo, but I gather it’s been hit and miss. According to a 2012 Reuters column, he was right about Facebook’s and Zynga’s disappointing IPOs and Palo Alto Networks’ somewhat better one.

On the other hand, Union Square Ventures’ Fred Wilson let Hamadeh have it with both barrels last year when PrivCo claimed to know who made how much when Yahoo bought Tumblr.

“Total garbage,” Wilson wrote. “There is not one fact in this PrivCo thing that is close to right. This is the same firm that predicted Foursquare would be out of business this year which will also prove to be nonsense.”

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