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Warner Music IPO ?

Posted By Barry Ritholtz On April 12, 2005 @ 6:03 am In Finance,Music | Comments Disabled

"A lawyer with a briefcase can steal more than a thousand men with guns."     -Mario Puzo [1]

Who in their right minds wants to buy a piece of Warner Music Group?

Answer: Somebody must, because next month, a $4 billion IPO is going to occur.


A WSJ [2] article last week observed that "Edgar Bronfman’s group acquired a legendary company [Warner Music] that
includes the Atlantic and Warner Bros. labels, and Warner/Chappell
Music Publishing. But the new owners have raised eyebrows in the music
industry with their aggressive cost cuts, reductions in the artist
rosters and the quick move to reap financial benefits from the company."

The IPO will allow insiders to reap an enormous $329.4 million cash windfall. "According to a document filed yesterday with the Securities and Exchange Commission. Meanwhile, only about $7 million of the planned $750 million IPO will be put toward Warner Music’s own operations." That seems amazingly abusive.

Think about this: A huge IPO goes out, the public puts money to work, and a mere $7 million dollars gos to towards operations, while insiders cash out 50 fold times more. And, its happening as Warner Music Group is under investigation [3] (they just received another Subpoena from Eliot Spitzer’s office).  I find that simply astounding.

Even more ironic, this IPO is occurring just as the industry has started to trot out their phony moral arguments [4] (Its just wrong!)  against P2P. It would be funny if it wasn’t so sad.

The Financial Times reports that "Goldman Sachs, Morgan Stanley,
Merrill Lynch, Lehman Brothers and Deutsche Bank have been selected to
underwrite the offering." I want to know this: Who are these banks
going to place these shares with? Insitutions are usually too savvy for
this sort of cash  out, and the public is pretty clued into the state of the industry. So who are the buyers? 

Here’s a disturbing WSJ excerpt: 

"A private-equity consortium led by Warner Music Chairman and Chief Executive Edgar Bronfman Jr. paid $2.6 billion to acquire Warner Music from Time Warner Inc. last year, and the group has moved quickly to ensure that the deal pays off for the investors. The new $329.4 million payout is to comprise $125 million raised by selling stock to the public; a large share of a new $141.5 million dividend disclosed in the SEC filing; and a $73 million "termination fee" related to a management agreement between the investors and Warner Music. The windfall would be separate from any profit the investors see as a result of an increase in Warner Music’s valuation after the IPO.

Mr. Bronfman, who owns 12.3% of the private-equity stake in the company through his investment vehicle, Music Capital Partners LP, stands to net $40.5 million of the total. On top of that, he will see an undisclosed share of a $10.1 million dividend payment that is earmarked for 10 of the company’s top managers who own restricted shares.

The new windfall will almost all come as profit, since the investor group, which also includes Thomas H. Lee Partners LP, Bain Capital LLC and Providence Equity Partners Inc., already has paid itself back almost all of the $1.25 billion in cash it put up to buy the company last year. That payout was made out of the company’s cash balance and by issuing high-interest bonds late last year.

All of this comes as Warner Music’s owners and managers hope to raise
$750 million from public investors, in a sale that people familiar with
the company have estimated would value it at around $4 billion. The
premium over last year’s $2.6 billion purchase price is noteworthy,
given the brutal condition of the music industry, which has been rocked
for five years by a host of problems, including digital piracy and
lackluster artist development. In the U.S., sales for the year are down
7% from a year earlier, according to data from Nielsen SoundScan.


Sure, the recording business is sufferring from Piracy. Not the industry standard P2P lament. Rather, a bunch of swashbucklers have invaded Warner Music, are about to strip it of all its booty, and will then hightail it across the Atlantic with their ill gotten gains.   

Avast ye swabs! There be Pirates about, mateys — the types that wear suits and ties . . .


At Warner Music, Investors Get Set To Reap Windfall [2]
Ethan Smith
The Wall Street Journal, April 8, 2005; Page C4

Warner Music continues with IPO plans [5]
Company expects to raise $1 billion from public offering
By James Politi and Aline van Duyn
FT, 4:23 p.m. ET March 8, 2005

Warner Music Group Receives Another Subpoena From Spitzer [3]
Wall Street Journal Online, April 7, 2005 7:49 p.m.

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/04/warner-music-ipo/

URLs in this post:

[1] Mario Puzo: http://www.amazon.com/exec/obidos/ASIN/0451167716/thebigpictu09-20

[2] WSJ: http://online.wsj.com/article/0,,SB111291599889001420,00.html

[3] investigation: http://online.wsj.com/article/0,,SB111288193703500789,00.html

[4] phony moral arguments: http://bigpicture.typepad.com/comments/2005/04/new_arguments_a.html

[5] Warner Music continues with IPO plans: http://www.msnbc.msn.com/id/7130058/

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