For potential bidders circling EMI Group Ltd., the takeover of Warner Music Group Corp. (WMG) may have doubled the price tag for the money-losing music label that was seized by its creditor just six months ago.
EMI, the London-based label of the Beatles and Katy Perry, said it would consider selling itself a month after Warner Music agreed to be acquired by billionaire Len Blavatnik for almost $3 billion, or 9.2 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Using the multiple paid for Warner Music and Ebitda estimates from Sanford C. Bernstein & Co., EMI may be valued at about $4 billion in a takeover, the data show.
That price would be as much as twice the $2 billion to $2.8 billion value Fitch Ratings estimated in January, a week before Citigroup Inc. (C) took control of EMI for failing to meet debt terms from Guy Hands’s $6.6 billion buyout in 2007. While free downloads slashed profits, customers have started paying for Apple Inc.’s iTunes and streaming service Spotify Ltd., fueling optimism that the music industry is rebounding. Initial bidders included Warner Music, Sony Corp. (6758) and Vivendi SA (VIV)’s Universal Music Group, said three people with knowledge of the matter.
“The amount of interest that was seen in Warner suggests that there is a vibrant market for music assets,” Claudio Aspesi, an analyst at Bernstein in London, said in a telephone interview. “Valuations will still be fairly optimistic. You might as well try to sell it while people are interested and still conversant in the dynamics of the industry.”
Offers for EMI have come from parties interested in the whole company and in its individual businesses, said one person, who declined to be identified because the negotiations are private. At least 10 proposals were submitted, said another person.
Dylan Jones, a spokesman for EMI, and Mark Costiglio, a spokesman for Citigroup, declined to comment on the bidders and a potential sale price.
EMI has both production and publishing units that sign and promote singers and songwriters such as Coldplay, Snoop Dogg and Pink Floyd. The company’s board said June 20 that it would explore strategic alternatives, including a sale, initial public offering or recapitalization.
Blavatnik’s Access Industries Inc. on May 6 agreed to buy EMI’s rival Warner Music for $8.25 a share, valuing the company at about $3 billion, including net debt, data compiled by Bloomberg show. The music label passed on an offer of $8.50 a share from Sony, Guggenheim Partners and Ron Perelman, people with knowledge of Warner Music’s auction, who declined to be identified because the deliberations were private, said in May.
Rolando Larrondo, a credit analyst at Fitch in New York, estimated Warner Music’s enterprise value, or the sum of its equity and debt minus cash, at $2.2 billion in a Jan. 25 research note. His projection implied a multiple of 5.4 times Ebitda, he said.
While Warner Music, the third-largest recorded music company, has a good brand name and assets, the valuation was “quite high” considering it’s not the market leader and had already cut costs, Ian Whittaker, an analyst at Liberum Capital Ltd. in London, said in a phone interview. The company was acquired as music sales, particularly in the U.S., started to “bottom out,” Whittaker said.
Return to Growth
“As the world moves toward more control of piracy and different digital revenue models are attempted, sooner or later, one of them will hit the right spot,” Bernstein’s Aspesi said. “So there is opportunity in the next year to see revenue lines stabilize and perhaps a return to growth.”
Based on declines at publicly-traded peers, Aspesi estimates that EMI’s earnings have fallen 10 percent to 20 percent since it last reported Ebitda of 332 million pounds for the year ended March 2010, the equivalent of $530 million based on historical exchange rates. A 20 percent drop would leave EMI with about $433 million in Ebitda in the 12 months through March, based on current exchange rates, data compiled by Bloomberg show.
Applying Warner Music’s 9.2 times Ebitda multiple, EMI may draw bids of almost $4 billion in a sale, including about 900 pounds ($1.5 billion) of net debt disclosed in February.
Fitch estimated EMI’s value between $2 billion and $2.8 billion, based on the financial information available in January before EMI’s recapitalization.
“EMI will probably fetch more for Citi than originally thought as more bidders have lined up and Warner Music produced a better-than-expected price,” Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York, said in a phone interview. “Music assets appear to be making a comeback. This is forcing investors to rethink the value of these music assets and demand is growing again.”
Citigroup provided about 2.5 billion pounds ($5.1 billion) of loans to finance Hands’s purchase of the company in August 2007 at the height of the leveraged buyout boom. The New York- based bank never found investors willing to take on the debt it provided for EMI as the financial crisis set in.
Citigroup seized control of EMI in February after the company and its owner, Hands’s Terra Firma Capital Partners Ltd., failed to meet the terms of loans used to buy the business, in a deal valuing EMI at about 3.2 billion pounds ($6.6 billion), according to data compiled by Bloomberg. The company posted a net loss of 512 million pounds in the year ended March 2010, the most recent period for which financial results were reported.
‘Looked Like Geniuses’
Hands, 51, said in a September speech that he and his firm “would have looked like geniuses” had they not invested in EMI.
“There’s no doubt they overpaid for the asset in the first place,” Liberum Capital’s Whittaker said. “It was a tough environment. You had, as well, a general financial crisis, which made it harder to refinance.”
Warner Music, whose artists include Frank Sinatra and Red Hot Chili Peppers, is now in the hunt for EMI, along with Universal Music, the world’s largest recorded music company, and No. 2 Sony. Competition in the industry makes it difficult to increase market share without acquisitions, Standard & Poor’s said in a July 6 report.
To fund Blavatnik’s buyout, Warner Music was selling junk bonds that include a feature that will make it easier to cut a deal to buy EMI. The bond sale includes a portion of notes that it can redeem for 104.75 cents on the dollar in the event of a “major music transaction,” according to bond researcher KDP Investment Advisors.
Consumers are increasingly paying for music online instead of downloading songs from file-sharing websites for free. Spotify, the London-based online music service, began accepting U.S. users in July. Subscribers get access to commercial-free songs on demand that can play on mobile devices and computers. A free version includes advertising. ITunes, started in 2003, reported its 10 billionth song download in February 2010.
“What you could argue is the music industry declines are starting to bottom out,” Whittaker said. “The bull argument on music would be it is a product that people are continuing to enjoy. The question has been for the past decade or so, how do you monetize that? There may be some tentative signs they are starting to find the right answer.”
Citigroup was seeking initial bids for EMI by the end of July or early August, aiming to clinch a sale of the record label within a couple of months, two people with knowledge of the situation said in early July.
“This is the last of the majors, effectively, available,” Bernstein’s Aspesi said. “So for anyone who wants to get into the business or anyone who believes they can get regulatory approval to consolidate the business, this is it.”