The strength of a Green Day album may have helped Warner Music with a bond sale.
There's Good News In The Music Business (WMG)
Dan Colarusso|May. 25, 2009
Tags: Music, Warner Music Group, Entertainment, Media, EMI
You know things are turning around in the music business when the rumors of a hookup between Edgar Bronfman's Warner Music Group and Guy Hands' EMI start swirling again.
Permutations of that deal have made the rounds often over the past few years, and BreakingViews.com rolls one out again today, positing that Warner may have switched places and has the ability to buy EMI.
In the past, EMI tried to buy Warner. But now the boot could be on the other foot. EMI, home of the Beatles
When the two last talked, the potential synergies from a combination looked to be in the order of $250 million — which would carry a net present value of some $1.6 billion.
The bigger sign, though, might be how investors flocked to last week's Warner debt offering. The company saw so much demand for a $500 million bond deal that it issued issued another $1.1 billion in senior debt. That deal gives Bronfman and his team much-needed financial flexibility--whether it results in an EMI deal or just the ability to run the business better.
Here's how WMG shares have performed compared to the S&P 500:
Warner Music Is Singing Again
By ROB COX
Published: May 24, 2009
Memorial Day used to be a celebratory event for the music industry. It wasn’t just the start the summer concert season and its attendant record sales, but also the weekend when FM radio stations coast-to-coast would play their top 500 countdowns, promoting the biggest hits from the Warner, Universal, Sony and EMI back catalogs.
Nowadays, not only have the countdowns, with their predictable “Stairway to Heaven” and “Free Bird” finishes, diminished. So too have the economics of FM radio and the music industry.
Sales of CDs are at half their levels at the start of the millennium. Yet as the few remaining Memorial Day countdowns reach their climax this year, some surprisingly dulcet tunes are emerging from one quarter of the industry.
Since the start of the year, shares of the Warner Music Group, the only publicly traded pure play on the recorded music business, have doubled, including a 23 percent gain just last week. Investors may be right in betting that the industry’s worst days are behind it, and that Warner is best positioned to capitalize, potentially by acquiring EMI.
The most bullish signal is Warner’s ability to refinance itself. Last week the group led by Edgar Bronfman Jr. decided to try to sell $500 million of new bonds to replace some of its existing debt and extend the overall maturity of its liabilities.
Like tickets for a 1970s concert for The Who, investors practically stampeded to get their hands on the paper. Investors were so enthusiastic that the company expanded the deal and sold $1.1 billion of senior secured notes. As a result, Warner paid off all its existing debt and extended the date by which it needed to pay it back until 2016.
A couple of factors accounted for the surprisingly robust demand. First, markets were in an agreeable mood overall. And the 9.5 percent annual yield on the bonds that Warner dangled certainly looked juicy compared with similarly dated Treasury bonds at 3.4 percent.
It also could not have hurt that the label’s latest release by rock superstars Green Day, “21st Century Breakdown,” had just hit the top of the charts after only a few days in the stores (though it wasn’t available at the biggest retailer, Wal-Mart, because of some of its spicier lyrics).
A new pricing policy by Apple iTunes, where hits are now sold for $1.29 instead of 99 cents, is also seen as a positive for the industry as a whole, because record companies are expected to get the largest share of that price increase.
But Warner itself has some other things going for it. The group has increased its market share by more than a percentage point over the past year to 21.8 percent. And while not immune to the troubling trends in the music business, Warner has performed relatively well. In its most recent quarter, earnings before interest, tax, depreciation and amortization fell 14 percent compared with a 34 percent decline for the segment.
What is more encouraging, the company’s revenues are now expected to hold flat at just over $3 billion over each of the next three years, Goldman Sachs estimates.
True, Warner is now paying a bit more in interest. But the new securities also come with fewer strings attached. This elimination of covenant pressure inspired Standard & Poor’s to revise its credit rating outlook to stable from negative.
The rejigged debt arrangements give Warner flexibility to do deals. And the timing of its coffer-filling exercise couldn’t be better. Its rival EMI is struggling under the $5 billion of debt borrowed by Terra Firma, the British private equity outfit run by Guy Hands, to take the company private.
Moreover, its chief lender, Citigroup, would love to exit its position. When the two last talked, the potential synergies from a combination looked to be in the order of $250 million — which would carry a net present value of some $1.6 billion.
That’s reason enough for investors to begin their countdown to a Warner-EMI merger.