INgrooves, the digital aggregator launched in 2002, hs purchased Fontana, the indie distribution company owned by Universal Music Group, the company announced today. Terms of the deal were not disclosed.
The deal gives the digital distributor a full array of services to offer to indie labels and at the same time provide capital to build up Fontana's capabilities in marketing music to brick-and-mortar merchants.
INgrooves itself already has a relationship with Universal Music Group, which bought 51% of the company in 2008, sources say. That stake was reduced to about 40% when Shamrock Capital, a unit of Shamrock Holdings, bought a majority interest in INgrooves in 2010. With the latest deal, Universal's stake in the company will be reduced to about 15%-20%.
In addition, sources say Shamrock is paying UMG about $5 million to $10 million for Fontana, which has annual sales of about $90 million and earnings before interest, taxes, depreciation and amortization of about $5 million to $7 million, Billboard.biz estimates.
While Fontana's EBITDA would normally value that company at about $25 million -- based on the four-times multiple that distribution assets have traded for in the past -- total valuation for the deal is difficult to estimate because even though UMG's stake in INgrooves is being reduced, it now owns a portion of a larger company.
Billboard.biz estimates INgrooves' revenue at about $45 million, which means the company will now have revenues of about $135 million, making it the fourth-largest U.S. indie distributor behind RED, Alternative Distribution Alliance, and eOne Distribution.
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Moreover, UMG benefits by being affiliated with an indie distributor that plans to grow with the backing of the deep-pocketed Shamrock Capital. A bigger, complementary INgrooves/Fontana operation with a revitalized game plan could benefit by the changing indie distribution landscape, with the Warner Music Group's ADA further integrated into WEA, and with the fate of Caroline/EMI Label Services Group up in the air due to its pending absorption into UMG.
While UMG is required to unload music assets in order to help finance its acquisition of EMI's recorded-music division, which is pending regulatory approval, sources say the deal for Fontana was in the works months before the major even came up for sale.
Still, the deal will reduce UMG's U.S. market share by about the 2% that Billboard.biz estimates Fontana has domestically, which could benefit the major if the regulators start weighing the claims of Impala and A2IM, two indie trade organizations that have been outspoken against the EMI acquisition.
Universal Music Group Distribution provides some shared services with Fontana, and sources say some of those services will continue, while other backroom/office functions will be assumed by INgrooves. On the flip side, INgrooves plays a role in the digital pipeline for UMG, helping it to ready and deliver music to digital service providers.
"Through this acquisition, we are now able to offer the independent music community a fully integrated physical and digital distribution marketing solution in North America," INgrooves CEO and found Robb McDaniels said in a statement.
In the announcement, the company said the deal will allow for the expansion of the Label & Artist Services group. This unit, which currently provides product management, online marketing & PR coordination, sync licensing, brand partnership marketing, sponsorships and advertising for the respective companies, will be a core focus of expansion in the coming months. The company said the value-added services will be available to INgrooves Fontana clients on a per project basis.
McDaniels also said the deal will provide the company's "client base with a larger sales force, more marketing resources and a one-stop global retail network that maximizes opportunities in this dynamic, challenging environment."
As part of the deal, Fontana president Ron Spaulding, who plays a key A&R role in bringing labels to Fontana, will stay with the company as president and run it, sources say, while Dave Zierler, recently promoted to president of INgrooves, will run that side of the company, with both reporting to McDaniels.
The deal comes four months after INgrooves scored its first No. 1 album, Mac Miller's "Blue Slide Park," which hit the top of the Billboard 200 in the SoundScan week ending Nov. 13.
In addition to Miller's label Rostrum Records, INgrooves distributes labels include Fat Possum, Nettwerk, Dualtone, ESL Music, Metropolis Records, while Fontana distributes Downtown, Vagrant, Strange Music, Water Tower Music, Dangerbird, Eagle Rock, Rap-A-Lot Records and Music World. Meanwhile, sources say a few Fontana distributed labels, including Eagle Rock and the Savoy Record Group, will not move to InGrooves/Fontana and will instead be distributed by Universal Music Group Distribution.
The deal also serves as a sort of reunion for Shamrock Holdings and the music business. The private-equity firm, begun by the late Roy Disney, previously owned the Music Plus and Sound Warehouse chains, both of which it sold to Blockbuster Entertainment back in 1992.