But sources indicate that the original ownership agreement at the time of the acquisition included a provision that said if the partners in Mubadala's group wanted to explore their options for cashing out, they could do so on June 29, 2018, or six years from the acquisition date.
That mechanism, however, isn’t like the one used by the Michael Jackson estate and Sony/ATV that detailed a process that could be initiated by either partner and result in one of the partners buying out the other, says one executive familiar with the EMI Music Publishing cash out mechanism. “It's not a buy or sell proposition, its just a mechanism that says that investors can have a way out if they want,” that executive says. “The important thing to note is that nothing needs to happen.”
That’s because a lot has changed since the deal closed in 2012, the executive notes, including increasing valuations for music publishing assets and the overall music industry's rebound in recent years.
Consequently, the EMI investors “do not have a turkey on their hands,” the executive continues. “This is a premier property whose value has gone up quite a bit since it was acquired. The investors have a winner on their hands. This is a high class problem to have. Do they want to cash in now; or do they want to see how high is up?"
On the other hand, if EMI Music Publishing does come up for sale next year, it will likely carry a hefty price tag. According to a credit report filed by Moody’s vp and senior analyst Greg Fraser in May, the company produced revenue of $588 million in the 12-month period ending in December 2016. Of that, Fraser estimated that net publisher’s share, or gross profit, was 45 percent of revenue, or $265 million. Sources familiar with EMI’s performance say that estimate is accurate.
Based on that gross profit figure, as well as the current pricing for music publishing assets, which sees assets trade hands at multiples of 10-12 times NPS, Billboard estimates that EMI Music Publishing could command a valuation of anywhere from $2.65 billion to $3.18 billion.
If those investors do want to cash out, Sony would be the logical buyer. But the last time EMI was up for sale, Sony chose not to be the sole buyer. The company never gave any clear-cut reason for that decision, but at the time there was speculation that Sony Corp. was fighting off activist investors who didn’t like the Sony balance sheet and viewed adding more debt from an outright acquisition as unhelpful to that situation. Others thought Sony may have brought in other investors because a consortium would give Sony cover before the antitrust regulatory agencies in Europe and the U.S. had to approve the deal. In the end, both reasons may have played into Sony's consortium decision.
Now, if Sony wanted to purchase the company outright, it could show its track record in administering EMI Music Publishing together with its own Sony/ATV assets to potentially prove its ownership wouldn’t result in antitrust issues. But if that argument is successful, Sony could open itself up to criticism from its investors who could be upset that the company could have had all of EMI for $2.2 billion in 2012, and now may have to pay $3.2 billion next year. Sony declined to comment.
And other suitors may come to the table as well.
While the mechanism for investors to cash out comes into play on June 29, 2018, the acquisition agreement includes a provision to keep Sony/ATV's administration deal in place beyond that date. In other words, if other bidders, such as private equity suitors, were to enter the fray, they could keep Sony/ATV as EMI's administrator; if Sony/ATV declines, another bidder would have time to effect an orderly transition to another administrator.
In the event of a sale, the Warner Music Group, which is slightly smaller than Sony’s music presence, would have just as fair a chance with the regulatory agencies as Sony would. But no one knows how the regulatory agencies would rule, or if Len Blavatnik’s Access Industries, which owns WMG, would even be interested.
BMG could also be a potential bidder. The company has long maintained it wouldn’t buy a major music publisher because it didn’t want to pay for the infrastructure that comes with it. But most of EMI’s infrastructure -- except for a financial and accounting department kept in place to monitor how it's being managed by Sony/ATV -- has already been stripped. In that scenario, BMG could acquire EMI and scale its own infrastructure, which would leave it with the ability to improve its upside profits on its assets as well as the additional profits brought in by acquiring EMI.
Regardless, those possibilities remain hypotheticals for the future. But in the meantime, one piece of EMI Music Publishing may already have changed hands.
Back in April of this year, it seems that Ardian, the giant French equity firm, obtained a piece of the EMI action when it invested $2.5 billion into funds run by Mubadala Capital. As part of that deal, Ardian received a stake in the Mubadala fund that owns its shares in EMI, sources say. An Ardian spokesman declined to comment on whether its wide ranging deal also included Mubadala’s stake in EMI.
As for whether another piece of EMI could soon come up for sale, the U.S. Department of Justice has been pursuing a seizure of assets case against Low Taek Jho -- also known as Jho Low, who invested in EMI through his Jynwel Capital in 2012 -- for allegedly using embezzled and laundered funds to buy various assets, including his stake in EMI.
One of the things that the DOJ's asset forfeiture lawsuit lays out is the ownership structure of EMI.
The acquisition agreement divides the consortium into two partners, Partners A and Partner B, and lays out the ownership structure of partner B, which owns, according to the DOJ court document, 60.18 percent of EMI Music Publishing. While the court document divides that majority stake of Partner B by 100 percent, Billboard extrapolated out the ownership for each investor in Partner B to get the overall ownership structure of EMI.
Billboard calculates of the Partner B owners that Mubadala owns 40.2 percent; Jynwel, or Jho Low, owns 13.4 percent; Blackstone/GSO, through several investment vehicles, collectively owns 6.26 percent; and Pub West LLC (believed to be David Geffen) owns just short of one percent. Based on other information provided to Billboard from sources, that means Sony owns approximately 29.5 percent; and the Michael Jackson estate about 9.8 percent of EMI Music Publishing.
It's entirely conceivable that Jho Low's estimated 13.4 percent stake in the company could still trade hands at some point, too. But in 2016, sources told Billboard that if that happens, the potential sale of Jho Low's stake probably wouldn’t trigger an outright sale of the whole company; instead, the DOJ’s involvement most likely means any dividends would be paid instead to the U.S. government. If the DOJ wins the case, Low’s stake could eventually be bought out by other investors, those sources speculated at the time.
As it is, the current investors are profiting off their ownership of EMI already. According to an August 2015 Moody’s rating report from Fraser on EMI, when the consortium was refinancing its acquisition of EMI, it also took advantage of that financing to pay out $100 million to investors. It's unclear if other dividends have been paid since then, but there appears to be plenty of cash laying around to have done so.
According to Fraser’s credit rating report in April of this year, estimated earnings before interest, taxes, depreciation and amortization were about 35 percent of revenue, or $205 million.
That report also notes that the acquisition agreement calls for Sony/ATV to get paid an administration fee of 15 percent of EMI’s net publisher’s share, which works out to about $40 million; and the agreement calls for EMI to provide an A&R funding for advances and catalog acquisitions to the tune of $20 million a year. If the admin fee and the A&R funding is subtracted from the $265 million in net publisher’s share, that leaves $205 million in EBITDA, validating Fraser's estimate.
With that type of EBITDA, EMI can easily handle its debt load of $1.414 billion, of which $350 million is in bonds and the remainder, $1.064 billion, is in the form of a secured term loan B. That debt was refinanced and replaced in 2015, giving EMI lower interest payments, and has been extended twice, most recently through 2023.
With that debt not coming due until 2023 and a better than comfortable two-to-one EBITDA-to-interest-payments ratio, there is no debt pressure on the company. After subtracting annual interest payments of $80 million, EMI has about $125 million in cash on hand each year, which could be used to pay taxes; pay down debt further; and, likely, to pay out more dividends to investors.
Still, the cash out mechanism is there to be exercised in 2018. But with the EMI investment performing the way it is, one insider says, “It could easily result in the status quo being maintained for a longer period of time, beyond next year.”