Parlophone Purchase: What It Means For Warner Music and Universal

In an unexpected and strong move, the Warner Music Group has won the auction for the Parlophone Label Group assets with a £487 million ($762 million) bid. The deal is expected to close mid-2013.

The deal will give the Warner Music Group, the smallest of the three major label groups, another $400 million in annual revenue, another 1.5%-2% in U.S. market share and catalogs of such artist as Coldplay, Radiohead, Kate Bush, David Guetta, Daft Punk, Sinead O'Connor, Tina Turner, Tinie Tempah and Jethro Tull, among many others. The Parlophone Group includes Chrysalis and Ensign Labels as well as EMI's recorded music operations in Belgium, the Czech Republic, Denmark, France, Norway, Portugal, Spain, Slovakia and Sweden – which will bring a significant boost to Warner’s international operations.

“This is a very important milestone for Warner Music, reflecting our commitment to artist development by strengthening our worldwide roster, global footprint and executive talent," WMG owner Len Blavatnik said in a statement.

Based on what WMG paid for the Parlophone assets, this means that Universal paid about 706 million pounds, or $1.1 billion, for EMI, if you also subtract out the 7 million pounds it received for selling Mute to BMG. It also means that the Warner Music Group's revenue should now be almost $3.2 billion annually, while its U.S. market share will be about 20.5% to 21%, sources estimate. WMG said it would finance this transaction through a new term loan facility provided through Credit Suisse, Barclays, UBS, Macquarie and Nomura. That means that the company's balance sheet will now carry about $3 billion in debt.Goldman Sachs and Bank of America Merrill Lynch served as the bankers while on SJ Berwin, Shearman & Sterling and Smiths Law handled legal matters.

UMG agreed to offload Parlophone in order to win regulatory approval for is acquisition of EMI’s recorded-music operations last year.

FAQ on Approval of Universal Music - EMI Deal

"Following this transaction, we will continue with our global reinvestment program that is rebuilding EMI and ensuring that the company is able to reach its full potential," UMG chairman & CEO Lucian Grainge, said in a statement. “And we’re satisfied that our agreement with Warner Music will provide a home for PLG artists.”

According to sources, other suitors included a joint bid from Sony Music Entertainment/BMG Rights Management, Ronald Perelman's MacAndrews & Forbes. The deal comes as a blow to the Sony-BMG investment tag-team, which some expected to be a shoo-in to win the deal, although that proposal was already hitting stiff resistance from the indie sector due to the market share it would have brought Sony.

The deal still has to be approved by the EU Commission. But a promising sign came when two leading indie organizations, Impala and Merlin, issued statements supporting the deal shortly after it was announced, which makes approval very likely. This represents an about-face from the reaction that the independent sector had with the Mute deal; it called on the EU to investigate after Mute was sold to BMG without an auction.

Helen Smith, executive chair of Impala, the trade group representing indie labels in Europe, said in a statement, "We would expect to see a significant re-balancing effect as a result of this -- after all, ‘two's company, three's a crowd.’ A stronger competitor to the Universal/Sony duopoly should make the market more open at all levels and give artists new opportunities. We would also expect this to be complemented by significant strengthening of the independent sector."

Charles Caldas, CEO Merlin, the indie organization charged with negotiating digital rights for its members, termed the deal "a positive result for our members” in a statement released shortly after the sale was announced. "Throughout this process, we have been clear that a market featuring two ‘maxi-majors’ [Universal and Sony] with a crowd trailing in the distance spelt danger for innovative new digital services. We believe this outcome will create an environment in which both Warner and the independent sector can compete effectively, and in which we will be able to assist our members and digital services continue the job of re-inventing the music business."
Charlie Lexton, the organization’s head of business added, "A competitive market guards against one or two big players dictating terms for everyone else – and this outcome can help prevent that."