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Scooter Braun's acquisition of Big Machine Label Group -- and the master recordings for Taylor Swift's first six studio albums -- is music's most compelling transaction so far this year. The $300 million price tag for the Nashville-based "major indie" company is triple what BMG paid for another large Nashville indie label -- BBR Music Group, home of Broken Bow Records -- in 2017. But the public back-and-forth between Swift, Braun and BMLG founder Scott Borchetta is among music's most sensational storylines of 2019.
Aside from the controversy, the deal was utterly normal from a financial point of view. Braun paid the going price for a major music acquisition; maybe a tiny bit above or below, but not outside the bounds of reasonableness. An ambitious manager might have seen a rare opportunity, acted in haste and acquiesced to the seller's price. Or the price might reflect BMLG's belief that the record industry is currently a seller's market -- for the first time in years, record labels are increasingly perceived as being good investments.
BMLG has more than Taylor Swift's back catalog, although owning those rights means royalties will continuous flow with little to no effort. The company's assets include both recordings and publishing matched by a full-fledged operation that has generated an estimated $90 million to $95 million per year over the past four years. What's more, BMLG is reported to have annual earnings before interest, taxes, depreciation and amortization (EBITDA) of roughly $40 million.
Big Machine reportedly had earnings (before interest, taxes, depreciation and amortization) of $40 million a year. In this case, earnings are measured before interest, taxes, depreciation (of physical assets) and amortization (of intangible assets like music rights). So, BMLG cost about 7.5 times EBITDA. That's in the sweet spot of music acquisition multiples. For example, Access Industries paid $3.3 billion, or 8.4 times EBITDA, for Warner Music Group in 2011. Eight years earlier, Warner was acquired by eventual CEO Edgar Bronfman Jr. and a host of private equity firms for 6.6 times EBITDA.
The outlier is Terra Firma's 2007 purchase of EMI Music. The private equity firm reshaped EMI's organizational chart and planned to squeeze out what it saw as inefficiencies. For this, Terra Firma paid 18.5 times EBITDA, according to reports. In 2011, EMI was split into two after the company defaulted on its debt to Citigroup. Last year, Sony/ATV Music Publishing paid $2.3 billion for 60% of EMI Publishing, valuing the company at $4.3 billion. At the time, EMI Publishing had an EBITDA of $663 million, giving the deal a 6.96 multiple.
Industries have a wide variety of EBITDA multiples. For example, paper products companies are worth 4.7 times enterprise value (taken from data maintained by New York University professor Aswath Damodaran). Enterprise Value is the equity plus debt minus cash, and with some small adjustments it's used as an estimate for an acquisition price (although EV doesn't include the premium often paid by the buyer). At the low end, the average auto parts company has just a 4.2 ratio. To put things in perspective, real estate development companies have a EV/EBITDA ratio of 33.8. High-growth companies, often in the technology space, also command high EBITDA multiples: online retail at 23.4, healthcare information and technology at 19.3 and information services at 18.8.
Both sides of the transaction stand to benefit. Braun, through his Carlisle Group-backed Ithaca Holdings, scored a major coup by acquiring Big Machine Label Group. Braun has a pop and R&B management roster to insert into BMGL's largely country and pop operation. Borchetta can leverage Braun's management business to his artists' advantage. On the personal side, Braun gets a seat at the recording industry's exclusive table; Borchetta, who said five years ago he owned 90% of BMLG, gets a tremendous payday.
In 2014, Borchetta was reportedly interested in selling BMLG for $200 million -- and that was with Swift still under contract. Although Borchetta was reported to seek as much as $500 million, the final closing price was still 50% higher than five years earlier. And Braun paid what appears to be a fair price for BMLG just as record labels are seen as a good investment again. By just about any measure, that's a win-win outcome.
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