Warner's target prices imply an enterprise value between $14.2 billion and $15.8 billion, 4.3 to 4.8 times the $3.3 billion that Access Industries paid in 2011. With $755 million of earnings before interest, taxes, depreciation and amortization for the 12 months ended March 30, Warner's EV-to-EBITDA multiple would range from 18.8 to 20.9. Warner might even appear to underestimate itself after Tencent Corp. paid the 30-times 2018 EBITDA for 10% of Universal Music Group at a $33 billion value in March. Large media companies don't trade at multiples typically associated with high-growth tech companies. But UMG's 2019 earnings on April 20 allows for an updated EBITDA of 24.9, based on an estimated EBITDA of roughly $1.3 billion in 2019. From that vantage point, Tencent may not have paid a premium over a fair value. And in February, Goldman Sachs analysts made a case for a $30 billion value but assumed 100 percent ownership -- UMG is valued less when it's part of a conglomerate -- and global subscriber growth from roughly 250 million to 875 million in ten years.
Nevertheless, Warner trading at a 20-times EBITDA would show how far music companies have rebounded after the struggles of the ‘00s and early ‘10s. Case in point: Warner paid 7-times-EBITDA for Parlophone Music Group in 2013 after Universal Music Group jettisoned parts of EMI Music in 2013. Since Access Industries paid 9.6 times EBITDA to acquire Warner for $3.3 billion in 2011, its 5.7% compound annual growth rate carried revenues from $2.87 billion to $4.475 billion. Over the past four years, a more germane period to potential investors, a quicker 10.8% CAGR carried revenue from $3 billion to $4.5 billion.
Music is attractive to investors because it's a countercyclical investment, meaning its value does not rise and fall with prevailing market trends. The recorded music business has grown 10% or more a year since 2015 because streaming services, with the help of smartphone manufacturers and telecom companies, convinced consumers that accessing music could be better than owning it, not because global GDP grew the same amount each year. Cable television is an extreme example: people haven't given up watching television; they have cheaper and arguably better options from the streaming services of technology companies such as Netflix, Amazon, Google and Apple. Odds are Warner will be pitching strong returns and diversification to institutional investors during its IPO roadshow.
This year could result in a one-year skew of earnings multiples if the COVID-19 pandemic hurts labels' and publishers' revenues. Although UMG reported a strong Q1 and Warner showed modest improvement, no company should say "never say never" during a once-in-a-lifetime pandemic with no knowable end. So on April 3, Warner added $120 million to an existing, untouched $180 million credit facility secured in 2015. Having credit during the COVID-19 crisis is like having martial arts training during a bar brawl, an insurance policy used only as a last resort. As CFO Eric Levin explained during Warner's Q1 earnings call on May 7, "it's helpful to us to know it's there if necessary."
The IPO will draw investors seeking a better way to invest in the rising recorded music and publishing industries. Warner will be the only pure-play, major music company on any stock market in North America or Europe. (In addition to recorded music and publishing, Warner makes a small percentage of its business from artist services and expanded rights, otherwise known as 360 deals that give Warner a share of an artist's revenue other than recorded music or publishing.)
Currently, investors' best opportunity to invest in the record and publishing businesses are through Vivendi, the parent company of Universal Music Group. But Vivendi, like BMG and Sony Music Entertainment, is a part of a conglomerate that doesn't focus only on music; Sony Corp. also has film and electronics companies, among others, and BMG represented just 3.3% of parent company Bertelsmann's 2019 revenue.
No technology company can be a proxy to a music investment. Spotify is a technology company with the slim margins of a media company rather than the eye-popping profits of a Facebook or Google. Sonos built a brand on music streaming through speakers and software that are merely conduits for music. YouTube is an automated advertising machine. Amazon is an ecommerce behemoth -- 2019 revenues of $87.4 billion were 4.3 times larger than the $20.2 million of the global recorded music business -- with a presence in music streaming and purchasing that's far larger than music's contribution to Amazon's overall business. Live Nation, SiriusXM and Ryman Hospitality don't give investors a path to labels and publishers.
Until UMG goes public in 2023, Warner can dangle before investors the only backstage pass to the music business.