How Much Is Sony/ATV Worth? A Deep Dig Into the Financials of the ATV Buyout

In announcing that Sony Corp. has agreed to pay $750 million for the Michael Jackson’s estate 50 percent stake in Sony/ATV, to some it might appear that the music publishing company has a $1.5 billion valuation. But Billboard estimates that the deal carried a price tag between $2.2 and $2.4 billion.

So far the only financial details publicly announced have been that Sony will pay the Jackson estate $733 million as well as its last annual dividend payment from the company, totaling $750 million.

Since leading a consortium to buy EMI Music Publishing, Sony/ATV generates between $600-650 million in annual revenue, depending on exchange rates. Of that, Billboard estimates about $125 million annually comes from Sony/ATV's administration of EMI, a relationship that won't be impacted by the change in ownership structure, sources say. Together, the portfolios generate about $1.2 billion in annual revenue, with EMI’s portion sitting around $700 million before paying out Sony.

Press reports suggest that, due to a prior agreement that had Sony/ATV serving as the guarantor of Jackson’s loans to his creditors, the right to a discount was included if and when the company bought out Jackson's stake. A source says this sale price was "25 percent off half of Jackson's equity," working out to a discount of 6.25 percent of the company's total value.

A valuation model constructed by Billboard citing a discount of $138 million was refuted by some sources familiar with the deal, saying it was a higher amount. While the sources didn't disclose the exact amount to Billboard, if a discount of $150 million -- as reported by one publication -- is the correct amount, this implies an enterprise valuation (debt plus equity equals enterprise value) of $2.4 billion for Sony/ATV.

If a $150 million discount is added to Jackson $750 million payment, that means Jackson's and Sony’s equity, is each worth $900 million. So with equity totaling $1.8 billion, that implies $600 million in debt being carried from the acquisitions that Sony/ATV made down through the years -- of Famous Music, Lieber & Stoller, and Rose/Acuff catalog -- giving Sony/ATV an enterprise value of $2.4 billion.

On the other hand, sources tell Billboard Sony/ATV was carrying around $400 million in debt from those acquisitions. If so, an enterprise valuation of $2.2 billion is implied. ($900 million for Jackson’s stake plus $900 million for Sony’s stake plus $400 million in debt.) In addition to the discount, other accounting adjustments were made to reach the valuation. Without knowledge of what those were, it becomes impossible to pin down the precise value of Sony/ATV.

Billboard’s estimate stands at $2.2 billion to $2.4 million.

One source said that the negotiations netted out a higher than expected valuation so the discount didn't matter to the sellers. So how did they agree on this valuation?

Typically, when an asset is up for sale the seller tries to inflate the price while the buyer attempts to lowball -- but the buy-sell option triggered by Sony/ATV made it unwise to play that game, since both parties could have wound up on either side of the transaction.

Initially, the Jackson estate's posture seemed to indicate that it wanted to be the buyer, and Sony the seller. But if the Jackson estate low-balled the valuation and Sony became the buyer instead, it would have hurt its return on the investment, and vice-versa. The same conundrum could occur with a overly generous bid also, if you became the buyer instead of the seller.

Consequently, the buy-sell process used a mechanism in which each side generated an independent valuation for Sony/ATV. If these valuations were close to one another, the difference would be split to come up with a final price tag. If they weren’t close to one another, a third independent investment bank was to be hired to come up with its own valuation, which would then be averaged against whichever valuation -- Sony or the Jackson estate -- was closest to it.

However, sources say the third independent investment bank was never brought into the deal and that the two sides negotiated the final valuation. Allen & Co. helped Sony come up with its valuation, while Shot Tower Capital advised the Jackson estate.


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