TodayInMusic: Warner Music – going down, down, down…?

February 9, 2011
Edgar Bronfman (Photo: Reuters)

Edgar Bronfman (Photo: Reuters)

After posting weak quarterly sales on Tuesday Warner Music’s shares closed down another 1.4 percent on Wednesday meaning its shares have dropped some 11 percent since Monday. As if that wasn’t enough concern, the heavily leveraged No.3 music company was given a heads-up that its debt is about to be downgraded. Ratings agency Moody’s placed ratings for Warner Music Group’s BA3 debt on review for “possible downgrade” which usually is as good as definite .

Warner Music Chief Executive Edgar Bronfman tried to put a positive spin on his company’s unimpressive quarterly performance, in an admittedly very tough environment for all music companies.  But even Bronfman, in a conference call with analysts, seemed slightly exasperated with the rate of decline and slowing digital growth, in a quarter which saw rivals grab market share from Warner Music:

“We think the business is extremely competitive all of the time, regardless of the overall environment, which is one of decline, currently. So, we battle for market share, but as I’ve always said, we also battle for margin share. So, we try very hard to be very focused on our margins. Having said that, we had a lot of releases in the December quarter and, by and large, they did not do as well as we expected them to do versus, obviously, other companies.

It’s hard to ascribe that we lost as a result of better releases from other companies, or maybe our releases simply didn’t meet the expectations of their consumers. We don’t know that much that quickly, but we don’t like to see ourselves losing share, and that happened to us in the December quarter. But, as I motioned, we’re very optimistic for the rest of the fiscal year and are seeing progress both in our release schedule and in our actual releases.”

Long-time Warner Music bear BTIG analyst Richard Greenfield today advised his investors to short Warner Music making the point that even Warner Music’s normally ‘steady as she goes’ song publishing unit Warner/Chappell is beginning to suffer from the fallout in recorded music. (Requires registration):

“Following fiscal Q1 results, we are increasingly confident with our WMG fiscal (Sept) 2011 estimates which call for a 10% drop in revenues and a 9% drop in EBITDA (including the annually reoccurring restructuring charges) and believe it could be worse as WMG is clearly struggling to hit their forecasts.”

Maybe Warner Music’s problems can be solved with its long expected combination in some form with EMI? Both companies are effectively up for sale at present. Warner Music has Goldman Sachs exploring the possibility while EMI is owned by Citigroup — for now.

Again, Greenfield isn’t so sure:

“While investors are hopeful that WMG can acquire EMI to leverage meaningful cost-savings, we believe EMI is likely to be sold to someone other than WMG.  WMG lacks a strong balance sheet and is spending substantial capital to slow the rate of revenue and EBITDA decline.”

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