Deal believed to be valued at $67.5 million.

The Warner Music Group is on the verge of signing an agreement to buy Rykodisc, sources say, in a deal believed to be valued at $67.5 million that is expected to close at the end of April.

Rykodisc, which has annual revenue of about $80 million, will operate as a stand-alone entity, but under the banner of WEA, the major-label distribution arm for WMG, sources say.

The Ryko company is currently overseen by corporate chairman and CEO Sam Holdsworth, formerly an executive with an ancestor company to JP Morgan Partners, the lead investment-owner partner in Ryko. Holdsworth is expected to leave the company when the deal closes. Since the April 2005 departure of Arthur Mann, one of the company’s co-founders, William Hein has served as label president and Jim Cuomo as president of Ryko Distribution. Both will stay on.

Sources say the Ryko label generates about $10 million in U.S. revenue and another $20 million worldwide. In addition to the Rykodisc label, Ryko Distribution accounts for about $50 million in U.S. revenue.

The acquisition will make WMG the only major that owns and operates two independent distributors. WMG also owns Alternative Distribution Alliance, the largest U.S. indie distributor with revenue expected to be about $180 million this year. The Ryko Distribution market share will be incorporated with ADA’s under the banner of the WMG independent market share in SoundScan, sources say.

WEA performs fulfillment for Ryko Distribution through its agreement with Cinram, which bought the WMG manufacturing plants and distribution facilities in 2003.

The Rykodisc label is also going to be a stand-alone operation, although its catalog may be turned over to WMG’s Rhino operation, sources suggest.

Investment bank Allen & Co. shopped the Rykodisc book in November and December. It is believed that Universal Music Group and EMI Music made earlier bids, but Ryko owners signed a contract to exclusively negotiate with WMG in January. When the exclusive period ended in late January or February, Allen & Co. is said to have reached out to the other majors, but found those bids since deflated.

JP Morgan Chase Capital Partners has been pushing to receive $65 million for Ryko, sources say. Part of that price is said to be based on high expectations for the Frank Zappa catalog, which Ryko acquired in 1994. Ryko projects higher-than-usual sales due to a marketing event surrounding the 40th anniversary of the release of the Zappa album “Freak Out!”

It appears the two investment partners—Chase Capital Entertainment Partners, the ancestor company to JP Morgan Partners, and Waterview Advisors—have roughly doubled their investment in Ryko, not accounting for potential cash outlays for operational costs or payouts such as dividends or management fees.

The two companies are believed to have ultimately paid about $35 million for Ryko, with Chase paying two-thirds and Waterview one-third. Ryko was initially bought by Chris Blackwell’s companies Palm Pictures and Island Life in 1998. Blackwell refinanced with Chase Capital in 2000, but had a falling out in 2001, and Chase took over Ryko ownership with Waterview.

Late last year or early this year, JP Morgan Capital Partners and Waterview also sold the Ryko Publishing operation to Evergreen Copyright Acquisitions for a price said to be about $10.5 million.

The Ryko operation was founded in 1983 by Don Rose, Arthur Mann, Doug Lexa and Rob Simonds. In the mid-1990s, the label turned to Genesis Merchant Group, a San Francisco-based investment company, to refinance in order to acquire the Zappa catalog. At the time, Genesis raised $44 million for Ryko, $20 million in a senior term note, $15 million in a revolving credit facility and $9 million in a senior subordinated note, but that debt load eventually was a factor in the sale of the company to Blackwell’s companies.

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