Music mogul life looks decidedly less rock ‘n roll
By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Music moguldom is looking considerably more Susan Boyle than Keith Richards. With Warner Music up for sale again, and vultures circling its British rival EMI, the industry seems suddenly hot again. But the glamorous aspect of discovering and creating rock stars has singed Warner’s public shareholders and buyout baron Guy Hands, who’s hanging onto EMI with his fingernails. This time around, would-be investors need to focus more sharply on the unsexy publishing end of the business.
True, the private equity firms that backed Edgar Bronfman Jr.’s $2.6 billion buyout of Warner Music in 2003 have come out ahead, thanks to some well-orchestrated financial engineering. But in the nearly six years since the initial public offering — and before markets became aware Warner would consider selling itself again — the shares had tumbled by 70 percent.
For Hands, the day the music dies may be nigh. After overpaying for EMI at the peak of the market in 2007, he then proceeded to alienate artists, repeatedly shuffle the management decks and, in a final desperate and unsuccessful ploy, sue his lender, Citigroup, for fraud. The bank could be poised to snatch EMI from Hands soon if he can’t devise a way to keep up with payments on the company’s $5 billion of debt.
The risky and costly recording part of the business has been responsible for much of the upheaval. By contrast, publishing has been steadier, with more diverse income streams, including from radio play, live performances and usage in films and TV shows. Warner’s publishing arm generated an estimated $240 million of profit last year after paying songwriters and artists. On a conservative multiple of nine times, the division would be worth some $2.2 billion, or about the same as Warner’s undisturbed enterprise value.
Clearly, the market attached little value to the recorded music business. And that seems to be the attitude of those sniffing around Warner and EMI. Publishing, of course, has its hazards, exposed as it is to the whims of music pirates and global copyright authorities. But these look more manageable against the dangers of generating hits and handling the whims, and egos, of musicians. Rolling Stone Richards may no longer embark on sleepless nine-day heroin benders, but his kind is still considered the greater financial risk.