December 5, 2023

Bids for Warner Suggest Faith in Industry’s Future

At least 10 investors were invited to submit offers in a second round of bidding for the company, which ended last week, a number that surprised analysts and industry executives. Warner’s board is expected to review the offers and make its decision as early as this week, according to two people apprised of the talks who spoke on the condition of anonymity because the negotiations were confidential.

“We’ve been a little surprised by the robust mess of this auction, given the well-chronicled problems of the music industry,” said Tuna N. Amobi, a media analyst at Standard Poor’s Equity Research. “It seems that the company is open to all kinds of scenarios.”

The music business’s problems are, at this point, very well known. Global revenue from recorded music has fallen 42 percent since its peak in 1999, according to the International Federation of the Phonographic Industry. Digital sales have grown steadily, but not enough to stem the losses from CD sales. Year after year, this story has changed little, but the bidding would indicate that investors think there is light at the end of a long dark tunnel.

The Warner Music Group includes recorded music and publishing divisions, and among the potential buyers — for all or part of Warner — are music companies like Sony, Live Nation and BMG Rights Management, a joint venture between Bertelsmann and the private equity firm Kohlberg Kravis Roberts; the Yucaipa Companies, led by Ron Burkle; Platinum Equity, led by Tom Gores, and the Gores Group, led by his brother, Alec Gores; Permira, another private equity company, which last bid for a major music company in 2006 with EMI; and the Tamares Group, led by Poju Zabludowicz, a Finnish-born real estate investor whose past includes work as an arms dealer.

The bids submitted last week hovered around $3 billion for the combined company, according to the people apprised of the talks. That is widely seen as a healthy price for the business, which before news of the auction emerged in January had an enterprise value of about $2.7 billion. Warner, whose chairman and chief executive is Edgar M. Bronfman Jr., has never publicly acknowledged that it is for sale — although some bidders have openly discussed the auction in the news media — and on Friday a spokesman declined to answer questions.

But coming just a few months after Citigroup seized EMI from the private equity group Terra Firma and wrote down $3.5 billion in debt, the interest in Warner — and in EMI, expected to go on sale after the Warner auction closes — is also seen by analysts and music executives as something of a vote of confidence in the beleaguered music business itself.

“There is a music business, and somewhere there is a value,” said Bishop Cheen, an analyst at Wells Fargo Securities. “But this is a choppy, challenged industry. It’s going to take someone with strategic advantages and deep pockets to make it work.”

Warner’s stock has also benefited from the publicity around the sale. Recently trading at less than $6 a share, the stock shot up near $8 on Thursday afternoon after CBNC reported that Yucaipa was bidding $3 billion, before the share price closed at $7.52, a daily gain of 8.7 percent. On Friday it fell slightly, to $7.45. (CNBC did not cite a source for its report; a Yucaipa spokesman declined to comment on Friday.)

But some analysts, bearish on music, believe the prices being discussed for Warner are simply too high.

“Warner hasn’t traded to a $3 billion valuation since 2007,” said Richard Greenfield, an analyst at the financial services company BTIG, “and as far as I can tell, the music environment is getting worse and worse, not better. So assuming the price talk is real, why is somebody willing to pay that much?”

One answer to that question, many analysts and industry executives say, is that while Warner and EMI’s publishing divisions are solid investments, whoever ends up with Warner’s recorded music assets will most likely want to combine it with EMI’s corresponding division, and remove hundreds of millions of dollars in operational redundancies.

That would reduce the number of major global record companies from four to three, and, some say, the savings might be enough to make a combined Warner-EMI label group profitable. (The two companies have had several failed attempts at mergers over the last decade or so.)

Another explanation is simply the lure of the entertainment industry, whose glamour and prestige have attracted many a billionaire before. In 2007 Terra Firma, led by the British financier Guy Hands, bought EMI for $8.4 billion, financed through a $5.5 billion loan from Citi. That deal was made shortly before the credit markets collapsed, leaving EMI unable to service its debt. But in retrospect, many analysts and industry observers believe that the price was simply too high.

“We’ve seen many massive mistakes made in the music sector before,” Mr. Greenfield said. “It’s always possible we’ll see them again.”

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