Warner Music Group Plans Modest Restructuring Under Access Ownership
Warner Music Group Plans Modest Restructuring Under Access Ownership

Now officially under new ownership, the Warner Music Group plans to achieve cost savings between $50-65 million over the next 27 months. The company plans to achieve those saving through "certain planned corporate restructuring initiatives," according to documentation provided to bond holders, which eventually will be filed with the SEC.

While that may seem like the Warner Music Group is headed for a big downsizing, contrast that plan with Terra Firma's cost saving agenda after it acquired EMI in 2007. Back then, it charged EMI management with realizing 200 million pounds ($324 million) in overall savings, and it achieved 80 million pounds ($130 million) to 100 million pounds ($162 million) of that in the first year alone, according to the Maltby Report for the period ended March 31, 2008. That means that EMI's first-year savings alone were twice as large as WMG's total planned savings.

Warner Music/Access Industries Deal Is A Win For Both

Moreover, not all of the WMG savings will come from restructuring, as the document says it also expects to realize savings simply from the shift from being a public-traded company to now being privately-held and due to reduced expenses related to finance, legal and information technology.

Of course, if WMG is successful in winning the ongoing auction for EMI, discussion about the planned $65 million in savings will be moot because that discussion will shift to a completely different dimension.

In other moves, while WMG envisioned raising $695 million in senior subordinated bonds, and $200 million in holding company notes, and $150 million in additional senior secured debt; in the actual offering, the company sold $765 million in senior subordinated bonds and $150 million in holding company notes; and the $150 million in senior secured bonds.

The bondholders of the $1.1 billion in senior secured bonds issued by WMG prior to its latest acquisition waived the requirement to redeem those debentures, so those bonds are still outstanding. That means WMG's debt now has total debt of $2.165 billion.

Based on interest rates reported by Debtwire of 11.5-11.75 for the $765 million notes, 13.25%-13.5% for the holding company notes and 9.5% for the secured bonds, Billboard estimates that WMG will have about $227 million in debt service, versus $195 million in interest payments made it its most recent fiscal year, according to its 10-K. In fact, because of its ability to sell more than expected senior-secured bond notes carrying 11.5%-11.75% interest payments, it was able to reduce its expected offering of the more expensive holding notes from $200 million to $150 million, which allowed WMG to shave about $7 million from its interest payments.

In yet another move to ensure liquidity, WMG has tapped Credit Suisse to provide a $60 million revolving credit facility, also secured like the bonds by WMG's U.S. assets.

Getting back to EMI, while the New York Post reported that an amendment to the bond offering documentation includes a financial covenant stating that if it makes a media company acquisition of more than $1 billion, its debt-to earnings before interest, taxes depreciation and amortization cannot exceed 4.6-to-1.

That story went onto report that Anthony Canale of Covenant Review said that as it stands now, WMG cannot buy EMI.

That's because WMG currently has total senior debt of $2.015 billion (not including the holding company debt) and adjusted EBITDA of $424 million, which means the ration stands at nearly 4.74-to-1, exceeding the 4.6-ro-1 ratio in the covenant.

However, it would be odd for WMG/Access financial executives to agree to allow such a covenant to be inserted and preclude that potential deal. More likely, they would design the covenant based on a projected financial scenario that would allow the deal to occur.

Moreover, Canale himself said many factors that could allow WMG to make such an acquisition, since whatever EBITDA EMI brings to the table would also be included in the equation; as would any incremental EBITDA realized from cost savings through consolidating the two companies. Also it would depend on how much new senior debt was used to finance the deal, he said.

Consequently, if WMG won the auction by bidding, say, $3 billion and putting up $1 billion in equity and raised $2 billion in debt, you would have to see how it would impact the formula. In its last Maltby report for the fiscal year ended March 31, 2010, EMI reported 334 million pounds in EBITDA, which at that time converted to $503 million to OANDA.com.

So in this proposed scenario, with $4.015 billion in debt and $927 million in EBITDA, the ratio would stand at 4.33 times to one, so WMG would be in compliance with the covenant and could make such an acquisition.

Also revealed in the bond documentation, WMG says it has a huge catalog of music videos, album art, lyrics and unreleased b-sides that it plans to exploit so that those assets can be fully monitized.

Finally, the report noted that Warner/Chappell Music had received a total of $30 million from the pending and unmatched settlement with the RIAA, which so far has seen $161 million paid out, according to what special master Ken Feinberg, the managing partner of Feinberg Rozen lawfirm, charged with overseeing that settlement said at the National Music Publishers Association meeting in June.

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