April 23, 2024

Reuters Breakingviews: A Warner Merger With Potential

The less glamorous music publishing side still sets the pace for any deal. This income stream from songs played on the radio or performed live has been steady for Warner, with the division’s operating profit before depreciation and amortization declining a mere 6 percent in the fiscal year that ended in September 2010, compared with the fiscal year in 2008. The recording side, which includes the Atlantic and Warner labels, has suffered far worse over the same span, with those earnings tumbling nearly a third.

Potential buyers like Ron Burkle and Len Blavatnik may have reason for optimism about the business of discovering and developing rock stars. The increasing use of smartphones and the development of cloud-based song libraries are creating fresh hopes of reinvigorating the legal distribution of music.

But everyone is mainly eager for a merger of Warner and EMI. The first attempt at a deal was in 2000, when European watchdogs shot down the idea. But the business has changed substantially and Warner’s next owner is likely to try uniting the company with the industry’s overleveraged No. 4 player seized earlier this year from Guy Hands, the buyout baron, by its lender, Citigroup.

Not only could the best executives and musical acts be cherry-picked from the two firms, but nearly the whole merged recording unit could be run with just one side’s cost base.

The last time these two tried a merger in 2006, annual savings were estimated at some $300 million. Assuming that still holds true, the estimated $2.3 billion present value of these savings would go a long way toward paying for any deal.

Warner and EMI are each worth roughly $3 billion. Selling one of the two publishing businesses to sidestep regulatory questions would probably fetch at least $2 billion. Despite the industry’s troubles, new investors could still enjoy a good return.

An Untapped Mine


Facebook’s success may seem sui generis. But the social network’s disputed paternity and escalating value — $85 billion at last estimate — is creating a familiar commotion. People are claiming a share of Mark Zuckerberg’s creation. The story bears striking parallels with past bonanzas, especially Nevada’s silver rush 150 years ago.

The Comstock Lode was the Silicon Valley of its day. The market value of companies excavating its wealth was about $40 million by 1865, about half the value of the real estate and personal property in San Francisco at the time. That would equate to about $60 billion in today’s economy. The system that sprang up around the mines included engineers developing new technologies to extract silver from stone. Hundreds of companies were formed. A few captured nearly all the spoils.

Just as today, the combination of uncertain ownership and tremendous lucre invited controversy. The mining company Gould Curry, for example, attracted 15 lawsuits in one year. Such legal claims consumed an estimated 20 percent of the revenue generated by the Comstock Lode in its early years of operation.

The outcomes resemble Facebook’s travails. Early and important figures — Eduardo Saverin at Facebook or James Finney at Comstock — were celebrated as genial figures, but pushed out for a fraction of the eventual riches. And like the Winklevoss twins suing Facebook today, others who claimed to own Comstock Lode land but who didn’t do any heavy lifting were given a chunk of cash and told to go away.

Outsiders can’t tell whether today’s claimants are victims or opportunists. The latest is Paul Ceglia, a wood-pellet salesman charged with fraud last year, who says he bought half of Facebook in 2003. Some mine owners of yore took money from investors before telling them a rich shaft was worthless. Other plaintiffs submitted fabricated evidence against wealthy miners.

The parallels do have their limits. Mr. Zuckerberg isn’t like Henry Comstock, for whom the lode was named. Mr. Comstock finagled his way in, using $50 and a blind horse. Mr. Zuckerberg actually built Facebook. That’s significant. An untapped mine with rich silver deposits is worth a fortune. An undeveloped social network is just a good idea. — JEFFREY GOLDFARB and ROBERT CYRAN

Article source: http://feeds.nytimes.com/click.phdo?i=799b80aa396b94ba5fe10b9c0ebf1ae4

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