Warner Music IPO ?

Tuesday, April 12, 2005 | 06:03 AM

"A lawyer with a briefcase can steal more than a thousand men with guns."     -Mario Puzo



Question:
Who in their right minds wants to buy a piece of Warner Music Group?

Answer: Somebody must, because next month, a $4 billion IPO is going to occur.

 

A WSJ article last week observed that "Edgar Bronfman's group acquired a legendary company [Warner Music] that includes the Atlantic and Warner Bros. labels, and Warner/Chappell Music Publishing. But the new owners have raised eyebrows in the music industry with their aggressive cost cuts, reductions in the artist rosters and the quick move to reap financial benefits from the company."

The IPO will allow insiders to reap an enormous $329.4 million cash windfall. "According to a document filed yesterday with the Securities and Exchange Commission. Meanwhile, only about $7 million of the planned $750 million IPO will be put toward Warner Music's own operations." That seems amazingly abusive.

Think about this: A huge IPO goes out, the public puts money to work, and a mere $7 million dollars gos to towards operations, while insiders cash out 50 fold times more. And, its happening as Warner Music Group is under investigation (they just received another Subpoena from Eliot Spitzer's office).  I find that simply astounding.

Even more ironic, this IPO is occurring just as the industry has started to trot out their phony moral arguments (Its just wrong!)  against P2P. It would be funny if it wasn't so sad.

The Financial Times reports that "Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Deutsche Bank have been selected to underwrite the offering." I want to know this: Who are these banks going to place these shares with? Insitutions are usually too savvy for this sort of cash  out, and the public is pretty clued into the state of the industry. So who are the buyers? 

Here's a disturbing WSJ excerpt: 

"A private-equity consortium led by Warner Music Chairman and Chief Executive Edgar Bronfman Jr. paid $2.6 billion to acquire Warner Music from Time Warner Inc. last year, and the group has moved quickly to ensure that the deal pays off for the investors. The new $329.4 million payout is to comprise $125 million raised by selling stock to the public; a large share of a new $141.5 million dividend disclosed in the SEC filing; and a $73 million "termination fee" related to a management agreement between the investors and Warner Music. The windfall would be separate from any profit the investors see as a result of an increase in Warner Music's valuation after the IPO.

Mr. Bronfman, who owns 12.3% of the private-equity stake in the company through his investment vehicle, Music Capital Partners LP, stands to net $40.5 million of the total. On top of that, he will see an undisclosed share of a $10.1 million dividend payment that is earmarked for 10 of the company's top managers who own restricted shares.

The new windfall will almost all come as profit, since the investor group, which also includes Thomas H. Lee Partners LP, Bain Capital LLC and Providence Equity Partners Inc., already has paid itself back almost all of the $1.25 billion in cash it put up to buy the company last year. That payout was made out of the company's cash balance and by issuing high-interest bonds late last year.

All of this comes as Warner Music's owners and managers hope to raise $750 million from public investors, in a sale that people familiar with the company have estimated would value it at around $4 billion. The premium over last year's $2.6 billion purchase price is noteworthy, given the brutal condition of the music industry, which has been rocked for five years by a host of problems, including digital piracy and lackluster artist development. In the U.S., sales for the year are down 7% from a year earlier, according to data from Nielsen SoundScan.

>

Sure, the recording business is sufferring from Piracy. Not the industry standard P2P lament. Rather, a bunch of swashbucklers have invaded Warner Music, are about to strip it of all its booty, and will then hightail it across the Atlantic with their ill gotten gains.   

Avast ye swabs! There be Pirates about, mateys -- the types that wear suits and ties . . .

>


Sources:
At Warner Music, Investors Get Set To Reap Windfall
Ethan Smith
The Wall Street Journal, April 8, 2005; Page C4
http://online.wsj.com/article/0,,SB111291599889001420,00.html

Warner Music continues with IPO plans
Company expects to raise $1 billion from public offering
By James Politi and Aline van Duyn
FT, 4:23 p.m. ET March 8, 2005
http://www.msnbc.msn.com/id/7130058/

Warner Music Group Receives Another Subpoena From Spitzer
Wall Street Journal Online, April 7, 2005 7:49 p.m.
http://online.wsj.com/article/0,,SB111288193703500789,00.html

Tuesday, April 12, 2005 | 06:03 AM | Permalink | Comments (6) | TrackBack (0)
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Comments

It's actually pretty simple. The reason they're not pumping a lot of money into the company?

It would be bad money after the good. They have enough promotion money as it is. It's already budgetted. It's not like your standard IPO, where they can build another facility, or increase their server farm, or whatever. The last thing they're going to do is use money to increase the size of their "farm" so to speak. That's a joke.

You have to realize the core business model for the music industry right now. They believe by ratcheting down the number of releases they make every year, they can squeeze all the current sales into less titles. Making them more money.

The ego and hubris here is amazing. They're culture pushers. That's not a bad thing really, but that's what they're selling. Culture. And Culture has this little nasty habit of well...to steal the analogy from the open source crowd, it wants to be free. It wants to grow, and change, and flow with the hopes, dreams and emotions of the individuals of the public at large.

And they believe they can control that by supporting less acts.

So WMG doesn't NEED more money. They don't WANT it. That's why. Not that I'm excusing it of course, but whatever. Who would buy that stock?

These guys have absolutly no idea about the particular field they're in.

The culture field.

Posted by: Karmakin | Apr 12, 2005 7:21:41 AM

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