The most disruptive bid for Warner Music Group could, surprisingly, also be the one that makes the most sense.
Live Nation's bid for the record label portion of Warner represents untapped potential, value that other bidders cannot unlock. At best, it would push recorded music into a new era unlike the other options on the table, assuming the deal could navigate through anti-trust regulators. At the very least, it's a bold move by a company filled with bold moves.
Bids from recorded music companies and private equity firms would not give Warner the kind of cross-platform power that could come from a deal with Live Nation. Such a deal would give Warner artists a real ticketing and global promotion infrastructure for their 360 artists, one insider tells Billboard. What a united Live Nation-Warner lacks in operating synergies may be overcome by revenue synergies, allowing Live Nation to make better bids for superstar artists.
In addition, single ownership of recorded music, ticketing and promotion could better enable other opportunities -- recorded music/ticket bundles, ticket sales at artist websites -- that are currently difficult to get done.
One vision of the future is to use recorded music more as a promotional tool than a product unto itself. In a sense, this is already happening on a large scale -- YouTube, for example, has more promotional value than monetary value. In this scenario, music fuels other areas of the artist's career.
In fact, Warner is already moving in that direction. In recent years the company has put new emphasis on licensing and sponsorships. And multi-rights deals take a cut of artist's sponsorship deals. Now consider that Live Nation generated $161 million in sponsorship revenue in 2010 -- revenue that arises not from a recording, composition or merchandise, but from the music's ability to generate consumer impressions. Concerts generated $3.4 billion and ticketing grossed just over $1 billion. Recorded music could be one spoke in a very big wheel.
On the same day news broke of Live Nation's bid for Warner's record label, BTIG analyst Rich Greenfield criticized the value bidders are placing on Warner. "Beyond the vanity element that drove Guy Hands/Terra Firma's disastrous acquisition of EMI, we simply do not see a reason why someone would pay $2.5 billion for WMG, particularly with EMI for sale as well," he wrote.
Of the reasons Greenfield gave why Warner is not worth $2.5 billion, the most notable is his estimate that Warner will have "essentially no free cash flow" in fiscal 2011. "WMG continues to funnel cash into small acquisitions to bolster its recorded music and music publishing revenues/EBITDA," he wrote.
If Live Nation acquired Warner, those "small acquisitions" could cease, as there would be no longer be a need for Warner to acquire management, promotion and merchandise companies -- Live Nation has them all. As mentioned above, the record label in the era of the multi-rights contract has a lot in common with today's concert promoter.
Greenfield prices Warner at $4.50, which puts the company's enterprise value at $2.2 billion. (Warner shares closed up 3.5% $6.77 on Thursday with about double the average daily trading volume.) "We simply see no reason why a buyer is going to pay a premium for WMG -- these are simply not must-have assets, within an industry suffering from significant uncertainty/headwinds."
Indeed. But perhaps one way to deal with the uncertainty and headwinds is to add recorded music into the business models being built around live events and ticketing. The other companies reported to have bid for Warner can't do that.