A Finnish Businessman; A Supermarket Magnate -- Warner Music Bidding Process Draws Strong Response
By all rights, prospective bidders for Warner Music Group should be spooked by the persistent slide in recorded-music sales, the treacherous transition to digital distribution and Terra Firma's disastrous acquisition of EMI.
But they sure aren't showing any signs of it so far. In fact, the response to the WMG auction is showing that investors retain a surprisingly robust appetite for major music companies.
Moreover, Citigroup's anticipated sale of EMI appears to have helped fuel greater interest in big music assets, rather than muddy the market for the WMG auction, as some observers had expected.
Why? Because it raises the possibility-however unlikely it appears at the moment-that one investor group could acquire both label groups and wring about $300 million in cost savings out of a merged entity.
"Private-equity buyout shops live off of getting consolidation efficiencies," says an executive with a Wall Street investment firm who is familiar with the auction. "If you put those two together, you're already ahead of the game and then any rise in revenue is all upside."
But just because it makes sense on paper doesn't mean it will happen. Industry sources note that prevailing in both auctions would require aggressive bids that could eat into potential cost savings.
According to sources familiar with the situation, the bids for WMG range from $2.7 billion to $3.3 billion. Given Warner's $1.9 billion in long-term debt, the bids would leave up to a $1.3 billion payday for the label group's owners, which include Thomas H. Lee Partners, Providence Equity Partners, Bain Capital and WMG chairman/CEO Edgar Bronfman Jr.
With more than 10 suitors submitting bids, and at least eight of them making plays for all of WMG, the auction has uncovered interest from a diverse group of investors.
Sources say bids for all of WMG have come in from strategic bidders like Sony Music Entertainment and music publisher BMG, both of which are primarily interested in WMG's Warner/Chappell Music publishing arm, as well as investment companies that have flirted with music industry investments, like Access Industries chairman Len Blavatnik, who already holds a 2% stake in WMG, and European private-equity firm Permira, which tried to buy EMI in 2006.
Other bidders include Tamares, a private investment group headed by Finnish billionaire businessman Poju Zabludowicz, and Guggenheim Partners, a principal owner of Billboard parent company Prometheus Group.
Among the more intriguing bidders are supermarket magnate Ron Burkle's Yucaipa Cos. and private-equity firms Platinum Equity and the Gores Group. Yucaipa is a former part-owner of U.S. music wholesaler Alliance Entertainment, while Platinum and Gores partnered to acquire Alliance last September.
Platinum and Gores are headed, respectively, by brothers Tom and Alec Gores. If the Gores brothers manage to prevail in the WMG auction, "watch for the third leg in that stool to become involved," an industry source says, referring to their brother Sam Gores, chairman of leading talent agency Paradigm.
All of the bidders declined to comment or didn't respond to interview requests. Warner's private-equity owners also declined to comment.Beyond those bidding for the companies, Bronfman's shadow hovers over the auction, says an executive with one of the companies bidding on WMG. "No one knows what role Edgar will take," the executive says.
One possibility, according to the Wall Street executive, is that one of the bidders partners with Bronfman and his management team. "It's better to ride the horse you know," he says, "than the one you don't."
Meanwhile, sources say Citigroup hasn't yet begun the formal process of soliciting bids on EMI. But all agree that the major will eventually be put on the block.
In a March 7 internal memo to EMI employees, EMI Group CEO Roger Faxon said that Citigroup hasn't yet laid out a timeline for an eventual sale. But he confirmed that "it is all but certain that we will go through a sale process," adding that some employees "will be drafted into the data-gathering effort" to prepare for an eventual sale.