Access Industries' proposed $3.3 billion acquisition of the Warner Music Group (WMG) is turning out to be a "best of both worlds" kind of deal for all involved.
For one, the private equity owners of WMG will get another payday on top of the 22% return they have already made on WMG. It's also a good thing for WMG in that it seems to not only insure that current management will stay in place, but that they may yet get another shot at acquiring EMI. And in a strange turn of events, it's also turning out to be a good thing for EMI, which is expected to be up on the auction block later this year.
When WMG hired Goldman Sachs to explore sale opportunities, industry pundits initially saw it as stealing a march on EMI, which Citigroup has indicated it will sell. But in fact, the WMG auction brought into the market a slew of investors, who now are educated and ready for an EMI auction.
"The WMG auction was good for holders of music assets," one industry executive says. "It shows there's still value in music assets."
Len Blavatnik has agreed to pay $8.25 a share in cash, with the deal expected to close in the third quarter. Although Bloomberg News is reporting that one of the bidders -- Platinum Equity and the Gores Group -- is considering topping the offer by coming in with a bid valued at $8.35 to $8.50 a share. But that report also notes that the two private equity firms plan to reach out to Sony and Universal to help them finance a higher bid.
Universal, however, will not get directly involved in an acquisition because of regulatory issues, company insiders say. Meanwhile, Sony as part of an investor group that also included Guggenheim Partners and Ron Perelman's MacAndrews & Forbes Holdings, was in the running to win the auction right up to the end. One industry pundit wonders if Sony would consider changing horses in the middle of a race, considering that EMI could be up for sale soon.
Platinum Equity didn't return a call for comment and the Gores Group couldn't be reached. Sony and Universal declined to comment.
In the meantime, WMG and Access Industries are proceeding under the assumption that the deal will close, although it still needs shareholder and regulatory approvals.
WMG chairman/CEO Edgar Bronfman Jr. clearly comes out looking like a winner, because he got a co-investor in WMG to bet on him again. After all, Blavatnik has seen Bronfman in action at WMG, from the initial acquisition to recruiting Lyor Cohen and the restructuring of the management team. Blavatnik has also seen Bronfman develop WMG's digital strategy and implement the 360, multi-rights deals.
"This deal represents a nice vote of confidence for the current management team," one WMG insider says. Blavatnik's not like Guy Hands; he doesn't think there is a silver bullet to fix things. Instead, Blavatnik's aware of the challenges and can assess what the upside will be. Clearly, of all the suitors, no one knew the assets better."
Not only do most industry observers expect Blavatnik to ask Bronfman to stay on, but also they think that's what Bronfman himself wants. "If that's the case, you have to assume that Bronfman thinks there is an EMI deal to be done," says Fred Goodman, author of "Fortune's Fool," which chronicled Bronfman's history in the music business.
"Blavatnik paid a big price for WMG so he had better get ready to go after EMI to help him rationalize what's he's paying," a financial executive involved with one of the other bidders says.
But that executive points out that while the auction may have helped Bronfman line up that he is the perfect partner to chase a potential acquisition of EMI, it also brought in a bevy of investors, who after pursuing the WMG deal are now well educated in the music industry and could be even more formidable bidders when the latter company comes up for sale.
Consequently, industry observers expect the auction for EMI will be even more competitive. So in addition to potentially being forced to pay a higher price, a WMG bid for EMI would also face the same regulatory issues that helped steer the WMG board away from bidders like BMG and Sony. IMPALA, the European trade group of independent labels, has already said that they would oppose strategic suitors for EMI.
In a statement on that potential, IMPALA executive chair Helen Smith said in a statement: "As many commentators have recognized, if one of the market leaders Sony or Universal were to make a move, they would meet a regulatory brick wall. Any attempt to combine EMI with Warner would similarly be blocked unless there are substantial remedies to solve the competition problems of going from four to three majors."
The WMG and Access Industries declined to comment.