Bertelsmann and KKR Seek New Harmonies in a Deal

Iconic buyout firm Kohlberg Kravis Roberts has bought a piece of Norwegian pop trio A-ha. No, the deal is not final confirmation that the world of finance has gone totally bonkers. In fact, KKR's tie-up with Bertelsmann's BMG Rights Management, which owns the A-ha catalog, makes a lot of sense.

Even as traditional music stores board up their windows, the music rights business continues to thrive. And the best royalty generators are often durable acts such as A-ha, which continues to record and tour but is probably still best known for its 1985 mega-hit Take on Me.

Those old tunes generate steady revenue when they're recycled in movies, video games, commercials, or ringtones. Moreover, there is an opportunity right now for a well-financed, experienced player to rationalize the notoriously fragmented music rights business, which is stuck in the vinyl LP age. The new joint venture, announced July 8, might even be a contender to acquire rights owned by Michael Jackson if they come on the market following the singer's death. "If you're willing to pursue innovative ways of doing business, it's a good time to build market share," says Mark Mulligan, who follows the music market for Forrester Research (FORR).

As in all good deals, KKR and Bertelsmann both have something the other needs. Bertelsmann has expertise in the music business but little cash for acquisitions. Operating profit at Bertelsmann, based in Gütersloh, Germany, plunged 54%, to $161 million, in the first quarter, making it that much more difficult for the company to pay down its $9.4 billion debt. Yet Bertelsmann needs to keep investing in new ventures to compensate for declines in existing businesses such as books or magazines. With KKR's money, "we will be able to actively participate in the expected market consolidation," Bertelsmann Chief Financial Officer Thomas Rabe said in a statement.

Winning Over Musicians

KKR does indeed have money, but with cheap credit for buyouts no longer so easy to come by, the private equity firm needs to find new places to invest. KKR plans to contribute $70 million to the Bertelsmann joint venture up front and to commit as much as $280 million in the future. KKR will own 51% of the outfit, and Bertelsmann executive Hartwig Masuch will manage it.

Bertelsmann sold all but a sliver of its music business to Sony (SNE) last year. But Bertelsmann probably still enjoys credibility among musicians, which can be important in securing rights. "Money alone won't be enough for many artists," analyst Mulligan says. "Bertelsmann has the reputation and the heritage."

The deal immediately generated speculation that the partners will bid for the music-publishing arm of hard-pressed EMI Group, which is owned by private equity company Terra Firma. More likely, though, KKR and Bertelsmann will focus on smaller deals. That's what BMG Rights Management has done since the unit's founding last October. In May, for example, BMG bought rights in German-speaking Europe to the Roy Orbison catalog, including Pretty Woman. BMG bought the A-ha rights in June. It has also acquired more contemporary music such as Goodbye, You Suck, by Shiloh and rights to the Kylie Minogue catalogue in Britain.

Much of the world's popular music belongs to small and midsize publishing companies or individuals. (For instance, BMG bought the Orbison catalog from the singer's widow, Barbara Orbison.) There is an opportunity for a company such as BMG to acquire smaller publishing outfits and bundle rights so they're easier to distribute digitally. Finnish handset maker Nokia (NOK), for example, is giving away music downloads with some handsets as part of its Comes With Music offering. But rollout has been slow in part because acquiring rights across national borders is a laborious process. "There is a lot of focus on alternative ways of generating revenue," Mulligan says. Currently, though, "it's too hard to get rights." Bertelsmann and KKR could be on the way to fixing that.

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