May 7, 2011

Billionaire Buys Warner Music Group

A bidding war for Warner Music Group has Russian-born American billionaire Len Blavatnik's company Access Industries as the winner in a $1.3 billion all-cash transaction for the company.

The sale of the music company comes at a challenging time for music industry with CD sales on the decline and digital piracy running amuck.

Even with these trying times, the deal has Warner Music valued at $3 billion, which includes the company's debt as well as cash "“ this is higher than the $2.6 billion it sold for in 2004 when the company was twice as big, reports the AP.

In 1929, Warner Bros. Pictures formed Warner Music in order to acquire the copyrights of music for its films. Then in 1958, Warner Bros. Records was created to distribute movie soundtracks and later went on to sign artists such as Neil Young, Grateful Dead, Frank Sinatra and Ray Charles.

Today the company has rights to such artists as Faith Hill, Red Hot Chili Peppers, Linkin Park and Josh Groban.

During a decade-long battle with online piracy, some industry analysts have praised Warner's sellers for cashing out, even though the company has coped rather well during these times.

Standard & Poor's equity analyst Tuna Amobi told the Associated Press (AP) that the sellers made "one of the best deals in the music space of all time."

The sellers include chief executive of Warner Music Edgar Bronfman Jr., along with private equity firms Thomas H. Lee Partners and Bain Capital Partners. Time Warner sold the company to them in 2004 for $2.6 billion, according to the AFP news agency. Approximately 56 percent of Warner Music's outstanding shares are held by these three entities.

The sale will include all of Warner Music's record labels "“ Asylum, Atlantic, Elektra and Warner Bros., as well as the prized Warner/Chappell music-publishing division, Access Industries says.

At $8.25 a share, the purchase price is a 34.4 percent premium over Warner Music's average share price over the previous six months.

Access Industries will also assume Warner Music's $1.9 billion debt was part of the sales agreement.

"We are delighted that Access will be the new steward of this outstanding business," says Bronfman, who will continue on as chief executive.

"They are supportive of the company's vision, growth strategy and artists, while bringing a fresh entrepreneurial perspective and expertise in technology and media," he told AFP.

The buyers on the other hand, he says, "Any time you have deep "“pocketed investors in some glamour business, anything can happen."

Access's chairman and founder Blavatnik is no stranger to Warner Music. He served on Warner Music's board of directors between March 2004 and January 2008 and already owns two percent of the company.

Warner Music is a "great company with a strong heritage and home to many exceptional artists," he says. "I look forward to working closely with the many talented people within the company."

Access Industries, controlled by Blavatnik could have what it takes to turn the music company around. The music industry is at a point where it can't get any worse, reports the AP. If he successfully bids for Britain's EMI Group Ltd, which is also up for sale, Blavatnik could benefit from cutting out duplicate jobs.

In addition, the digital innovations could bring the industry into a revival.

Access's head of media Jorg Mohaupt understands the challenges faced by the music industry as it seeks to adapt to the digital age.

"The music industry is at an inflection point where digital adoption is rapidly gaining momentum," Mohaupt told AFP. "Warner Music, as one of the most progressive forces in the music business, is well positioned to capture this opportunity for music creation and distribution."

Sales figures for the industry suggest that the deal is well timed, with sales of albums in the United States increasing by 1.4 percent in the first four months of this year to 146 million, according to Nielsen SoundScan.

Even though U.S. sales of CDs dropped by 9 percent at the same time, it is still less than the 20 percent drop that occurred in 2010, reports AP.

With the help of digital media downloads, this could be the turning point for growth in album unit sales since 2004.

Nielsen analytics vice president David Bakula told AP that the increase didn't happen because of one-time factors such as a bunch of top artists releasing albums all at once, nor did it happen from discounts. Tracks sales were able to rise regardless of being sold for $1.99 apiece, this up from 99 cents a few years ago.

U.S. sales were just $6.3 billion last year, way down from $14.3 billion at its peak in 2000.

Chief executive of digital music club eMusic Adam Klein says that people are not willing to pay for a lot of the music, even though they demand better ways to store, play and share music.

The "perception of value has changed [for consumers] and will continue to change," he told AP. "The industry has got to move quite quickly to keep up with that or piracy will remain rampant."

Currently, Amazon.com has launched its new cloud service that allows users to share, review and listen to music without having to store it on their personal computers. And Google Inc. and Apple Inc. are also believed to be working on similar technologies that will encourage people to pay for music.

Klein says that the huge costs of running a music label today, with high royalties demanded from innovators, has held the digital music industry back.

Undoubtedly, the acquisition will cause more painful layoffs, as Warner now has about 3,700 employees, down from 5,100 in 2003 reports the AP.

Warner Music's board of directors has approved the transaction, but now it is up to the shareholders to see the deal through.

Once the deal is closed, expectedly in the third quarter of this year, Warner Music will turn into a privately held company.

Jon Ogg, an analyst with 247WallSt.com, says that the sale of Warner Music marks "the end of the public pure-play music studios, which have been under attack from independent labels started by musicians and under fire from the Internet."

In addition to Clapton, Kid Rock, Sinatra and Ray Charles, Warner's talents also includes such artists as the Bee Gees, The Doors, Youssou N'Dour, REM, the Red Hot Chili Peppers, Green Day, Metallica, Genesis, Led Zeppelin, Seal, The White Stripes, Fleetwood Mac and Neil Young.

Warner Music shares gained 3.54 percent or 28 cents on Friday to close at $8.18 on Wall Street, with a high that day of $8.24, just a penny short of the sale price.


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