June 24, 2024

DealBook: Warner Music Is Sold, Ending a Long Auction

Madonna is among Warner Music's artists.Kevin Mazur/Hope for Haiti Now, via European Pressphoto AgencyMadonna is among Warner Music’s artists.
Len Blavatnik, who is buying Warner Music and is expected to try to buy EMI.Rick Maiman/Bloomberg News Len Blavatnik is buying Warner Music and is expected to try to buy EMI.

8:52 p.m. | Updated

The Warner Music Group agreed on Friday to sell itself to the Russian-born billionaire Len Blavatnik for a total of about $3.3 billion, ending a months-long auction of the music company that is the home of artists including Green Day, Red Hot Chili Peppers and Eric Clapton.

The deal puts Mr. Blavatnik, who came to America as a penniless teenager and built a $10 billion empire by investing in oil and metal companies, at the helm of the world’s third-largest music company. It also sets up another potential blockbuster deal: Mr. Blavatnik is hoping to use his fortune to bid on the EMI Group and merge it with Warner Music, creating the world’s largest record company, people involved in the deal said.

The sale of Warner Music, long considered a trophy asset given its glamorous heritage, comes as the record industry continues to struggle with its transition to a digital future. Digital music downloads have been rising, but not nearly at fast enough a pace to replace the revenue lost from falling CD sales. Mr. Blavatnik will also have to contend with Warner Music’s strained financials; the company’s revenue declined 6.7 percent to less than $3 billion last year. His investment company will assume Warner Music’s roughly $2 billion of debt in the deal, as well as pay about $1.3 billion in cash.

Most analysts said Warner Music shareholders would receive a surprisingly rich payday — $8.25 a share, which is about 34 percent higher than Warner Music’s average stock price over the last six months. When the auction started, it was unclear if anyone at all would bid or whether bidders would seek to carve the company up.

“For Warner Music, it’s almost the perfect scenario,” said Tuna N. Amobi, a media analyst at Standard Poor’s Equity Research. “The best outcome for the auction is to sell the entire company, and the value they’re getting is at the high of any estimate.”

Warner Music had attracted dozens of potential buyers, from other music companies to billionaires seeking to rub elbows with rock ’n’ roll celebrities.

At one point in the bidding — in what would have been a remarkable twist — Sean Parker, the billionaire co-founder of Napster, which nearly ruined the music industry with its free file-sharing, expressed an interest in making an offer as part of a consortium with the billionaire Ron Burkle.

By this week, however, three suitors had emerged with strong prospects. Mr. Blavatnik; Tom and Alec Gores, brothers who run their own private equity shops; and Sony/ATV Music Publishing, which had been working with the billionaire Ronald O. Perelman and the investment firm Guggenheim Partners.

Mr. Blavatnik had long been seen as the most likely winner of the bidding. A former Warner Music board member, he has retained close ties to top company officials like Edgar M. Bronfman Jr., the company’s chairman and chief executive.

“I am excited to extend my longstanding involvement with Warner Music,” Mr. Blavatnik said in a statement. “It is a great company with a strong heritage and home to many exceptional artists.”

Since immigrating to the United States in 1978, Mr. Blavatnik has become one of the world’s richest men through his varied investments, primarily in the industrial sector. His company, Access Industries, owns stakes in TNK-BP, the Russian oil giant, and LyondellBasell, a chemical company that has rebounded from bankruptcy. (Mr. Blavatnik is fending off a lawsuit by that company’s creditors, who contend that his takeover of the chemical maker piled it with an unsustainable amount of debt.)

His next big quest, people close to him said, will be to try to buy EMI, too, a transaction that virtually everyone on Wall Street seems to be anticipating.

“The next step is that I would expect Access to look at buying part or all of EMI and making a larger record company, to consolidate the industry into three competitors rather than four,” said Laura Martin, an entertainment and media analyst with Needham Company. “That helps pricing power, and also helps business-model innovation go faster.”

Besides EMI and Warner, the other two big music companies are the Universal Music Group and Sony Music Entertainment.

EMI was seized by Citigroup earlier this year after its owner, the British private equity firm Terra Firma, defaulted on a $5 billion loan. Combining Warner and EMI, analysts say, could eliminate hundreds of millions of dollars in redundancies, making the investment profitable.

But a deal would likely face regulatory scrutiny. Just hours after Mr. Blavatnik’s deal with Warner was announced, Impala, an independent music industry group based in Europe, put out a statement saying, “Any attempt to combine EMI with Warner would similarly be blocked unless there are substantial remedies to solve the competition problems of going from four to three majors.”

The sale of Warner Music, however, is music to the ears of its controlling investors, a group of private equity investors who were questioned at the time they acquired the company from Time Warner in 2004. The investors — THL Partners, Mr. Bronfman, Bain Capital and Providence Equity Partners — had bested a rival bid by, of all companies, the EMI Group. THL held the biggest position at about 51 percent, including co-investors, having poured about $525 million of its own money into the deal. Bain Capital held about a 25 percent stake, while Mr. Bronfman and Providence split most of the remainder of the equity.

The buyout group reaped a significant payday during their first year of investment, when Warner Music paid out about $1.4 billion in dividends to its shareholders.

The investors are expecting a return of about two times their initial investment from the deal with Mr. Blavatnik. THL alone expects to generate an internal rate of return of about 34 percent, some of these people said.

The deal with Mr. Blavatnik is expected to close in the third quarter. He is expected to finance the purchase with cash on hand, as well as with financing provided by Credit Suisse and UBS.

Warner Music was advised by Goldman Sachs; AGM Partners, the advisory firm run by Alan Mnuchin; and the law firm Paul, Weiss, Rifkind, Wharton Garrison. Access was advised by Credit Suisse, UBS and the law firm Debevoise Plimpton.

Ben Protess and Andrew Ross Sorkin contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=d91ed13d49ce26669475bfd8abf5767d

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