State of Discord

Sony Should Sell EMI Music

The price looks too high and publishing is a lackluster business.
Photographer: Chris Ratcliffe/Bloomberg

Sony Corp. is in talks to increase its stake of almost 40 percent in EMI Music Publishing to a majority interest, according to Bloomberg News.

"Adding EMI's extensive catalog would solidify Sony's position as the largest music publisher, as paid streaming services proliferate," Lucas Shaw, Nabila Ahmed and Yuji Nakamura wrote.

This is true. But it doesn't make it a good idea. In fact, the opposite may apply.

A sale of some sort is imminent because Mubadala Investment Co., EMI's Abu Dhabi-based owner, looks set to trigger an option that would mean Sony either has to buy out its interest, or the whole business gets sold.

Mubadala is seeking a valuation of at least $4 billion versus the $2.2 billion the Sony-Mubadala consortium paid in 2012. That means to get full control, Sony would be on the hook for as much as $2.4 billion.

When Sony joined the purchasing group six years ago, its cash investment wasn't in line with its 39.8 percent equity stake. Instead of the $876 million such a share would imply, Sony only ponied up $320 million. The rest of its investment appears to have been in-kind, because as part of the deal, EMI's new owners contracted Sony's publishing arm -- Sony/ATV -- to provide administration services for the business.

Out of Proportion

Sony only put in a small share of the cash to buy EMI Music Publishing

Source: Sony annual reports

This means Sony would be spending 7.5 times more money than the original transaction for a 1.5-times stake increase. 

I don't think it's worth it.

There's no doubt the music industry is back on the rise after years of struggling through the digital era. Spotify Technology SA and its competitors are to thank for that. Yet growth isn't exactly stellar. According to IFPI, global recorded music sales climbed 5.9 percent in 2016. It's possible the figure was higher last year, but it's hardly skyrocketing.

The music industry has two main revenue streams: recording, from which payments go to the person who sings the song or plays the music; and publishing, from which payments go to those who wrote the lyrics and the sheet music. (There's also licensing, live shows and merchandising.)

Sony has both businesses, and publishing is a minnow compared to recorded music and another division called visual media, which makes money from selling the sounds used in animations and games.

Hit Play

Recording is a far bigger part of Sony's music business than publishing

Source: Sony annual reports

Note: Data is for sales to outside customers, and doesn't include intra-company sales.

Publishing has the upside of being a possible long-term revenue stream because words and written music have a longer shelf life than recordings (thanks to covers, TV commercials and films). Yet Sony's own figures indicate it isn't a growth business. In fact, publishing has been flat over the 2014-2017 period while recorded music and visual media climbed 12 percent and 109 percent respectively.

Stop Press

Sony had a boost in publishing revenue after joining a consortium that bought out EMI Music Publishing. Growth has been flat since then

Source: Sony annual reports

Note: Data is for sales to external customers

Two years ago, when Sony bought out the remaining 50 percent of Sony/ATV owned by the estate of Michael Jackson for $750 million, we learned its publishing business was worth $1.5 billion. 1  According to documents published in 2016 by the European Commission as part of its takeover review, EMI is about 1.5 to 2 times the size of Sony/ATV. Assuming a similar size now as then, EMI would be worth $2.3 billion to $3 billion, a far cry from the $4 billion Mubadala seeks.

Given such a drastic markup, and the fact publishing isn't a growing business, it would probably make more sense for Sony to sell EMI and move on.

That way it still has its existing music business, including Sony/ATV publishing and a recording business that's five-times larger, and would gain extra cash to deploy elsewhere.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. The estate also owned a 10 percent stake in EMI Music Publishing.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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