Even so, the Japanese conglomerate is still the most likely buyer of EMI, sources tell Billboard, and publishing unit may never end up on the auction block as many are anticipating.
Below is a guide to how the process will unfold. (Sony Corp., the other majors and the various companies mentioned in this report either all declined to comment; or couldn't be reached for comment.)
Who are the current EMI owners? EMI Music Publishing is owned currently by a group of investors, which, led by Sony Corp., in 2012 acquired EMI for $2.217 billion from Citi -- which had taken over ownership of EMI from Terra Firma after the investment firm experienced a technical default on its loan from the bank. Its ownership structure is divided between two groups of investors. Partner A, which took 60.17 percent for an investment of $483.333 million in cash, consists of the the Abu Dhabi government's state-owned firm Mubadala Investment Co.; Jynwel Capital, an investment firm led by Malaysian financier Jho Low, Blackstone/GSO, and Pub West, LLC, believed to be a company owned by David Geffen. Partner B includes Sony/ATV Music Publishing and the Michael Jackson estate, which combined owned 39.83 percent by virtue of putting up $320 million in cash into the deal. The balance ot the payment came from $1.414 billion in borrowings via $350 million in bonds and a $1.064 billion term loan, with total interest payments of about $80 million annually.
Looking at those owners as separate entities, Sony owns approximately 29.95 percent of EMI and the Michael Jackson estate about 9.8 percent of EMI; with Sony/ATV and EMI management, Billboard estimates, owning the remainder sliver of equity on their side. Mubadala owns 40.19 percent, Blackstone/GSO owns 6.28 percent and Geffen just short of 1 percent, while, Jynwel, whose CEO Jho Low who has been under investigation by the U.S. Dept. of Justice for using embezzled funds to pay for EMI among other assets -- owns 13.4 percent.
Why is there talk EMI is up for sale? When the consortium bought EMI Music Publishing, they worked in a date that after six years of ownership, the investment group of Partner A could decide if it wanted to sell. June 29 marks that day, and in advance, Mubadala has been meeting with potential suitors to decide if it will tell Sony Corp. it wants to sell. Sources say Mubadala will be a seller.
What happens if Mubadala wants to sell? Per the agreement worked out at the time of EMI's acquisition, the sale process gives Sony Corp. first dibs on whether it wants to buy EMI. As part of that process, Mubadala also has to tell Sony what valuation, or sale price, it wants. Sony then has two months, until the end of August, to decide if it wants to buy EMI; and if it does, to negotiate a deal. If Sony declines to buy, Mubadala takes control of the sale process and likely would hire an investment bank to run an auction.
If there is a sale, how will price be determined? Since the acquisition, EMI Music Publishing has fared very nicely under the administration of Sony/ATV Music Publishing and the guidance of SATV chairman/CEO Martin Bandier -- and its current and potential growth will factor into the new price tag. In 2016, a report from Moody's showed that the EMI Music Publishing catalog had revenues of $588 million with net publisher's share of about $265 million and earnings before interest, taxes, depreciation and amortization of $235 million. Since that report, sources indicate that EMI's topline revenue has grown about 8% to $645 million while they say EMI's net publisher's share is above $300 million, with some sources placing it about $320 million. Moreover, Moody's Investors Service analyst Gregory Fraser predicted that earnings before interest, taxes depreciation, and amortization, would grow to about $275 million by the end of EMI's fiscal year of 2017.
What do those performance numbers mean for EMI's valuation? Publishing typically trades on a multiple of net publisher's share, also known as gross profit. While the trading level of the multiple has fluctuated through the years, until recently a 12-times multiple was considered a peak value for a catalog with a lot of iconic songs. But that was before Carlin America and SONGS Music Publishing traded at multiples that range from 14-to-16.5-times NPS.
If the traditional 12-times multiple for NPS of $320 million is applied, that would value EMI at about $3.84 billion. But if the multiples that Carlin America and SONGS traded on of 14.5-to-16.5-times NPS come into play, that puts valuation at $4.64 billion to $5.28 billion. Most sources think the price tag will be between $4 billion and $5 billion.
What other factors could impact price? Some think the higher range will come into play in EMI's pricing because the music industry is enjoying a revival, thanks to the growth of streaming. But even though EMI is teeming with iconic songs including the Motown catalog, it has a lot of older songs whose copyrights may revert to their original owners, because the U.S. Copyright law allows songwriters to reclaim their copyright ownership of songs 56 years after the songs were written. That means that songs written in 1962 are eligible for that to happen this year. Moreover, for songs written after 1978, songwriters can reclaim copyright ownership after a shorter period of 35 years.
What price will Mubadala ask? Sources suggest Mubadala may approach EMI's valuation like its playing a game a chess. If it asks for too much and Sony passes, then will likely kick off an expensive auction process, given the bankers, investment advisers and lawyers that will be working on the deal. Nothing would prevent Sony from then participating in such an auction, though that would be unlikely at a price it had rejected. If no other suitors bid match the price Mubadala asked of Sony, that would be considered a "busted auction," and likely leave the same current owners remaining in place.
Regardless of Mubadala's price, will Sony necessarily decide it's a buyer? Some sources say that Sony might not be a buyer because it would be now paying another couple of billion of dollars for an asset it could have already owned completely back in 2012 for just $2.2 billion, if it hadn't formed a consortium group. But times were different back then, with a dissident shareholder giving it grief over shareholder return and also for having too much debt on its balance sheet. The consortium also made sense back then for another reason: to get the deal past regulators, which only happened after Sony agreed to sell some $200 million in publishing assets from its and EMI's catalog.
But other sources say that Sony is loath to part with the valuable EMI catalog, with all of its iconic songs. Furthermore, times are different now for Sony, which has nearly $12 billion in cash in the bank as the music industry is making a roaring comeback with possibly another decade of growth before things slow down, making the EMI acquisition a solid bet, even if the returns take longer because of the high upfront pricing.
Finally, if Sony was the buyer, it wouldn't have to spend the whole $4 billion to $5 billion since it already owns 29.95% of EMI. If EMI sold for, say $4.5 billion, and if Sony could use the same percentages of equity and debt was used in the EMI acquisition back in 2012, it would only need to come up with $3.22 billion, which means it could pay $1.16 billion in cash and borrow the rest. So all in all, it would be a less expensive deal for Sony than any other suitor.
If Sony passes, who are the potential buyers? Among the strategic players that could afford the price and handle the catalog administration are the other two majors, Universal Music Group and Warner Music Group, along with BMG, ?Kobalt Music Group, and Concord. Sources suggest that Round Hill still has to digest Carlin and the EMI deal would be too big to take on. Primary Wave likely could pull off the financing of such a deal, considering it already has BlackRock Alternative Investors as a potential backer, but it's unlikely that Primary Wave could handle the administration for the EMI catalog, since it has to out source that function for its own catalog.
And BMG and Concord aren't likely interested at current pricing levels, especially BMG, which is choosing to focus on organic growth over acquisition, while Concord has moved onto looking at master recordings because it sees publishing valuations as too high, according to sources.
Kobalt, though, has proved formidable in terms of raising funding, and has the systems to handle EMI from an administration standpoint. It likely would be easier for the two majors to raise the funding, than Kobalt, sources suggest. But UMG would have more regulatory issues than any other buyer and would likely have to sell more publishing assets in order to make an EMI acquisition, if the stricter EU Commission would approve the deal at all, some sources suggest. UMG's Universal Music Publishing Group had nearly $950 million in revenue, which means that the if it bought EMI, the combination would be a publishing company throwing off $1.6 billion in revenue, which would likely cause regulators to either deny the deal or make UMG sell a lot of assets, some sources say. But another source points out that UMG has experience in getting big acquisition by the EU regulators: witness its previous acquisitions of the BMG publishing catalog back in 2006; and its 2012 acquisition of EMI's recorded music catalog.
Still, sources say WMG has the best chance if Sony declines to buy. It would have an easier time in getting past the regulators than UMG, since its $550 million is similar to the size of Sony/ATV. Both Sony and WMG could point out to regulators that Sony/ATV's administration of EMI didn't create any anti-trust issues during the last six years. Both Sony and WMG would get away with selling fewer assets than UMG would in order to appease regulators.
What about institutional investors or technological suitors already in the industry? A few sources briefly speculate that Google, Apple, Spotify or Facebook might become a suitor for EMI, but most think that unlikely and say institutional investors like a private equity firm is more likely. But since EMI's staff was merged into Sony/ATV, EMI has no infrastructure other than a financial department monitoring the catalog's performance for the non-strategic EMI owners. It's highly unlikely an institutional investor would choose to build an infrastructure from scratch to handle administration for EMI, so such a suitor would pair with a strategic player; or need to hire a strategic player to serve as administrator. The latter would add to the cost of the deal and figure into the valuation an institutional investor would be willing to pay. Moreover, a high valuation would lower the return on investment, eliminating some institutional investors from the field. As it is, Sony/ATV currently gets 15% of net publisher's share as an administration fee, which last year equaled almost $50 million in fees for Sony. If someone other than Sony buys it, there will be a transitional period of say six months to sort out the administration, then Sony/ATV's admin contract ends and a new deal is needed to keep them in place. In that case, Sony might ask for a higher administration fee, although its competitors could also vie to fill that role. Still, one way or another Sony may say have a say in the ultimate cost of operating EMI and thus the valuation at which the catalog ultimately might trade.