January 25, 2011

Warner Music turns to Goldman Sachs for options

warner music group logo

Major record label Warner Music has today turned to investment bank Goldman Sachs to look at its future strategy options, including a possible buyout of rival EMI, and possible sale of its esteemed publishing arm (Warner/Chappell) to Kohlberg Kravis Roberts.

Warner/Chappell is reported be worth around £1.25bn, the sale of which could provide finance for the EMI takeover. KKR, who, along with Bertelsmann already own half of another major music publisher, BMG, has shown interested in Warner for some time, and had been discussing a joint bid for EMI, when the talks turned to a complete buyout of Warner instead.

The New York Times shares that CEO Edgar Bronfman Jr. sent a letter last week to shareholders saying that their "proven ability to outperform the rest of the industry” will see them through the challenges ahead. Mr Bronfman speaks the truth, with Warner's revenue declining much less than the rest of the majors. According to the International Federation of the Phonographic Industry, total sales of music declined nearly 23 percent over the last five years, whereas Warner's revenue declined around 9 percent, due to improved profit margins through cost-cutting. Warner reported a $145m net loss last year, compared to the $1.51bn net debt reported by EMI.

Private investors, led by Mr Bronfman, bought Warner Music from Time Warner in March of 2004 for $2.6 billion in cash. The company went public in 2005, trading at around $14 per share. Today they stand at a little over $4 a share, although little of the shares were released into public hands, so the investors have already profited well through dividends

KKR buying Warner as well as EMI would no doubt mean huge savings by combining and streamlining the companies' recorded music divisions, but any bid would face tough regulatory challenges to combining EMI Music Publishing with Warner-Chappell, two of the largest music publishing houses around.

The fact that Warner is looking to either take on another huge music industry empire, or sell itself, is pretty much a 'double down or get out'. Their investors are obviously looking to either go big, pick up EMI, and stick it out in the music biz... or cash in and go home.

Just one thing here....

One of the reasons that the major labels got into trouble in the first place is because they involved people who cared about money more than the creation, exploration, discovery, shared enjoyment and art of music. And now, Warner's solution (after boycotting Youtube and video games) is to involve Goldman? When loyalty is devoted to the bottom line, horrible things can happen to the arts.

Lee Jarvis.

(Previously posted at UK Music Jobs' blog.)

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