Warner Music’s $3.3 bln sale cues up same old song

May 6, 2011

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Warner Music’s $3.3 billion sale sounds awfully familiar. Under Edgar Bronfman’s leadership, the company has outperformed rivals. But Len Blavatnik is still buying it for less than half its 2005 IPO price. The billionaire is a relative insider unlikely to bring any big strategic ideas. Outsiders haven’t fared much better solving the industry’s problems. That means it will probably be the same old financial engineering song.

This is the second time Bronfman has destroyed significant shareholder value in the process of buying and selling a music company. After adding Polygram to his family’s Seagram holdings, he offloaded the whole empire to Vivendi <VIV.PA> in a stock deal that proved disastrous. And although Bronfman helped produce a nice return for Warner’s private equity backers, minority owners in the public markets have fared markedly worse. The company listed six years ago at $17 a share. Blavatnik is paying $8.25.

It wasn’t for want of relative performance. Between 2004 and 2010, Warner’s recorded music revenue tumbled by 15 percent, just half the decline suffered by the industry. And its operating margin last year bested that of larger rival Universal Music. Bronfman led the march into digital sales and revamped Warner’s recording deal model with artists like Paramore to include a cut of their concert and merchandise sales.

Blavatnik made his fortune in aluminum and oil but is no stranger to rock ‘n’ roll. He served on Warner’s board for years. Blavatnik’s company boasts some digital know-how but he’ll probably leave Bronfman running Warner and there’s nothing to suggest the oligarch has any novel notions of transforming the business.

Of course, outsiders haven’t had any better ideas about how to turn the industry around. The reign of TV broadcasting boss Andy Lack at Sony BMG was a failed experiment. British buyout baron Guy Hands found that reshaping the music business wasn’t an easy sell to the EMI artists whose buy-in he needed. He mainly just hacked out costs.

It may not be so different for Warner. Wringing extra morsels from digital sales and artist deals holds only so much promise. The far bigger opportunity is a combination with EMI’s recorded music business and the huge synergies it would yield. It’s a refrain that sounds good to every generation of investor.

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