How Taylor Swift Could Get Her First Six Albums Back - and Push Label Prices to New Heights (Analysis)

Now that Taylor Swift has signed a contract to release future albums through Universal Music Group, can UMG close a second deal to buy Big Machine Label Group, which owns Swift's back catalog?

As Swift held talks with labels, tech companies and other potential financial partners in recent months about a new recording deal -- which ultimately went to UMG's Republic Records, she announced on Instagram Monday -- people close to the discussions told Billboard that the one thing the 28-year-old megastar wanted most was to regain ownership of her first six albums.

Now, one way she stands to regain her catalog is if UMG buys Big Machine, which is on the market for between $300 million and $350 million. Sources familiar with artist contracts say that whatever deal Swift signed with UMG might have contingencies built in to ensure that Swift would eventually gain ownership of her old masters, if UMG wins the Big Machine auction.

If UMG is willing to accommodate her goal, the big question for UMG then would be how many years would it need to control Swift's catalog in order to recoup its investments and make a worthwhile profit before returning control to Swift. UMG does similar math before inking many of its deals, sources say, including the new Swift agreement, which gives the Republic label a long-term license to Swift's new recordings, but not ownership of them. Neither UMG nor Swift disclosed the length or other terms of their agreement.

Giving artists their rights back is taboo for the major labels, given their ownership-based business models, and they're loathe to set such precedent. Yet, there are a number of instances where labels have turned over ownership of an artist's masters in order to get their signature on new contracts. Artists that now own their masters include Metallica, AC/DC, Pink Floyd, Chicago and Garth Brooks, among others. And nowadays, returning copyrights has become a competitive strategy for rivals like BMG, which has signed a slew of big names by assuring their rights will revert back to the artist after a limited time. Artists often opt to renew such long-term licensing deals with their labels, given the difficulty of marketing their catalogs on their own.

The fact that Big Machine founder and majority owner Scott Borchetta is seeking $300 million to $350 million indicates that he had no intention of returning Swift's catalog to her first -- otherwise the label wouldn't command such a price, sources say. But Swift, in theory, could also partner with financiers to buy Big Machine herself.

A New Label Pricing Frontier

Industry observers say that if Big Machine is sold, its valuation may set a new benchmark pricing for master recordings and record labels. As music publishing prices have soared in recent years, master recordings have looked attractive in comparison, but sources suggest the $350 million asking price may establish a multiple of 10 times net label share (NPS) -- profit after subtracting artist royalties, publishing royalties on downloads and physical formats, manufacturing costs, distribution costs and accounting reserves for various potential write-offs.

Publishing catalogs have been trading at more than 15 times their net publishers share -- or gross profit after paying off songwriter royalties and expenses related to royalties -- for years, but recorded music catalogs, which require more hands-on marketing, have traditionally only fetched three to four times their so-called net label share, with some recent valuations at seven to eight times the label's earnings. The 10x multiple has been achieved very rarely, but could become the new norm for master recordings if Borchetta gets his way. To investors, master recordings are beginning to look more attractive in that they resemble publishing catalogs, requiring less work to monetize than ever, thanks to streaming's predictable -- and growing -- monthly payments.

As a private company, Big Machine doesn't disclose its financials, but Billboard estimates that the company's revenue from recorded music has ranged from $80 million to $120 million annually during the last four years, averaging about $90 million to $95 million annually, figures that some executives familiar with the company's performance confirm are in the "ballpark."

Billboard was unable to determine how profitable Big Machine is. But typically labels can achieve net label share of 48 percent of revenue; and 43 percent after catalog marketing costs; but before all other selling, general and administrative costs are taken into account, says a financial executive who's often involved in buying and selling assets. Because Big Machine is mainly a country label and likely more weighted to physical, that source speculates net label share might be closer to 35 percent of revenue. So at an average of $95 million, net label share might be $33 million, which at a 10x multiple puts it almost in the middle of the $300 million to $350 million range Borchetta is said to be seeking.

Earlier in the process, sources say Macquarie Group had expressed interest in the deal, representing Modern Media Acquisition Corp., an investment vehicle created by Cumulus founder and former president/CEO Lew Dickey that raised $210 million to buy media assets. Dickey and Borchetta have done business together before, when they did a joint venture to create Big Machine's Nash Icon label in 2014. While an SEC filing by Modern Media describes a potential "business combination" with an unnamed private party in a deal that will end if it's not consummated by, or before, Feb. 17, 2019, sources say that filing refers to another deal, and that Dickey has withdrawn from the Big Machine auction. Modern Media couldn't be reached for comment.

Besides Borchetta, Big Machine's stakeholders include Taylor Swift's father, who owns about four percent of the company, and Toby Keith, who also counts four percent.

While some sources believe a sale of Big Machine is imminent, it's not a sure thing. Four years ago, when Big Machine's distribution deal with Republic/Universal Music Group was ending, Borchetta decided to shop his label and at the time was looking for a suitor to ante up between $200 million and $225 million. But ultimately, Borchetta re-upped his distribution deal with the Universal Music Group in exchange for UMG turning over full ownership in the Republic Nashville label joint venture. Borchetta never said why didn't sell; he had a number of suitors willing to go forward, including Snap, the company that owns Snapchat, and Roc Nation. Neither company responded to a request for comment, nor did Big Machine.

But not selling then turned out to be a very wise decision, says an industry exec who has been involved in many sales and acquisitions of music assets. "The whole climate has changed from then," that executive says. "Streaming didn't look the way it does now and country has finally started to share in the streaming bonanza. In not selling back then, [Borchetta] now gets to enjoy the industry's upside from streaming, in addition to the value he created by building his label."

Bigger Than Swift

Big Machine still has Florida Georgia Line, Reba McEntire, Brantley Gilbert, Thomas Rhett, Rascal Flatts and Sugarland, among other acts. Depending on the year, Swift's portion of Big Machine's U.S. sales and streaming activity ranges from the 21.2 percent of the label's total in 2016 to the 56.6 percent she had in 2015. In 2017, she comprised 41.2 percent and so far this year, her sales and streaming account for 34.1 percent, according to Billboard calculations using Nielsen Music data. Overall, Big Machine Label Group's market share adds up to 1.16 percent year to date, according to Nielsen Music.

"If he is looking to sell, Borchetta is certainly sitting in the catbird seat," says one major label president. "If I were him, I would cash out."

If Borchetta ultimately decides to sell his record label operation, the executive likely will still be involved in the music industry: sources say he hasn't been shopping his Big Machine publishing company.

Melinda Newman contributed to this story.

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