Will Warner Music Seize a Window Of Opportunity and Go Public Right Now?

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Markets are rebounding and the U.S. economy is starting to open back up — conditions that may inspire WMG's owner to cash in on Wall Street.

Since early March, when the Warner Music Group decided to delay the initial public offering it had announced the month before, it had seemed as if the company's plans to go public could be derailed by the COVID-19 pandemic that shut down economies around the world and plunged asset pricing in most capital markets.

But now, it seems WMG is forging ahead with its plans to become a publicly-traded company.

On May 7, when Warner issued its financials for its fiscal second quarter, the company also filed an amended S-1, saying that its listing had been accepted by NASDAQ. But that wasn't all that happened in its filings. That amended S-1 also included a modified and expanded revolving loan capacity, which increased from $180 million to $300 million. Not that it needs it right now -- in the five years that it's had the revolver, the company hasn't drawn down a single dollar.

But beyond the expanded loan capacity, the amendments also contain enhanced allowances that give the company the ability to take on even more debt, when and if it refinances its current $2.983 billion debt load, which includes a term loan and five different debenture issues, all of which mature between 2023 and 2026.

So with the stock market performing decently right now, thanks to a pricing comeback after a historic pandemic-related plunge -- and with parts of the U.S. economy beginning to open up -- it looks like Len Blavatnik's Access Industries, which owns WMG, will take advantage of this window of opportunity to cash in on some of the value it created from its 2011 acquisition of the company.

TIMING IS EVERYTHING

Before the pandemic, the NASDAQ Composite had been flirting with a 10,000 point milestone and the Dow Jones Industrial Average had been chasing 30,000 points. But as the crisis unfolded, the NASDAQ plunged to below 7,000 points and the Dow Jones dropped below 19,000 points in mid-March, before they both partially rebounded. Currently, the Dow is at nearly 24,000 points, while the NASDAQ, which will host the WMG stock, sits just above 9,000.

But these market conditions may not last for long. Fears abound that as governments around the globe move to open up their economies -- and if people relax their guard with social-distancing precautions -- the coronavirus could begin to spread once more, which would likely re-shut down economies and send stocks prices diving yet again.

Which means that all things considered, right now may be the best chance to pull the IPO trigger in 2020 that would give Blavatnik's Access Industries a shot at a decent ballpark valuation for a stock offering, if not at a lofty price Access might have achieved before the pandemic began.

In February, Billboard estimated WMG's valuation at between $10 billion to $12 billion on the bottom end and $15 billion to $16 billion on the top end. While its most recent financials don't showcase the company at its best -- it lost $74 million on fiscal second quarter revenues of $1.07 billion, versus $64 million in net income on revenues of $1.09 billion -- WMG overall has been posting strong results for the last few years, including $755 million in earnings before interest, taxes, depreciation and amortization, as calculated for the rolling 12-month period, as of March 31, 2020.

That leaves plenty of leeway for the highly-leveraged WMG to handle an estimated $140 million in annual interest payments, as well as take on an additional debt load down the road should management decide that's what's needed as circumstances evolve. That would likely involve further refinancing its current debt, something that the company has been doing all along by replacing existing debt with roughly the same amount of debt but at lower interest rates with more flexible financial covenants. Such new debt would likely contain covenants that allow for expanded debt capacity.

While the company is taking steps to ensure it's greased with plenty of liquidity should it need it, that doesn't mean WMG will actually increase its debt load -- rather, it's setting up prudent precautions amid the unstable economy since nobody knows how, if and when things might recover.

A SAUDI CONNECTION?

The other thing that happened on May 7 that might have an impact on the company's public offering: a four-month-old rumor about Middle Eastern money in the form of the Saudi Arabia Public Investment Fund (PIF) backing an investment into or acquisition of the Warner Music Group became the subject of press reports.

When those rumors began circulating at the beginning of the year, knowledgeable sources, including those independent of WMG and Access, told Billboard the rumor was without merit and that there had been no discussions. Those same sources say nothing has changed since, and that there still have been no discussions with any Middle Eastern sovereign wealth fund, other than WMG reportedly negotiating to buy a stake in the Saudi-based Rotana Music. That deal has been up in the air for over a year.

Besides that, industry sources point out that such a deal with the PIF is unlikely for several reasons. For example, with the recorded music business model now largely dependent on streaming -- WMG's latest recorded-music revenue was 64% digital -- the company is somewhat immune to the economic recession caused by the current pandemic.

As such, the Warner Music Group -- with $484 million in cash and full availability of its $300 million revolver -- is not in the same cash-needy position as two companies the PIF recently invested in, Live Nation and the Newcastle United soccer club, both of which are suffering from the global cancellation of live events. Or, as one investment banker skeptical of the Saudi rumor puts it, "Live Nation needs cash; the Warner Music Group doesn't."

Consequently, even in the current economy, the Warner Music Group retains its status as a trophy investment property that will command a pretty penny whether Access sells some of the company through a public offering or does a deal with another suitor.

But the latter seems unlikely. Access' IPO will be through a stock offering that would allow it to retain complete control of WMG by issuing two stock classes, one to new investors and one, with all voting power, going to insiders. That's a move that could turn off some institutional investors. But if Access is willing to gamble on an issue that could impact pricing in order to retain complete control of WMG, Blavatnik presumably wouldn't sell all or some of the company to another suitor in a private transaction that could result in ceding some influence over the operation.

The investment banker also notes that the PIF is typically a bargain hunter that wouldn't want to pay the top-dollar prices that investing in WMG would require. Or as another longtime music industry dealmaker less politely puts it, the Saudi investment fund "are bottom fishers looking for distressed assets, but Len will want a big price for any deal."

The Saudi PIF didn't respond to a request for a comment, while the Warner Music Group declined to comment citing the company's quiet period, as required by U.S. law before a public offering.

But that quiet period may serve Access and Blavatnik well. The Saudi rumor re-emerged just as WMG amended its S-1 filing and reported it had gained approval for the NASDAQ -- leaving them conveniently unable to comment on a rumor that serves to highlight the attractiveness of WMG to potential investors, just ahead of a possible public stock offering.

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