Record Labels

Why Warner Music Is Going Public Now & How No One Saw It Coming

WMG
Illustration by Max-o-matic

     

And the possible $15 billion question: What’s the company worth?

On Feb. 6, in a move that took both Wall Street and the music business by surprise, Warner Music Group filed plans to make a public stock offering underwritten by Morgan Stanley, Credit Suisse and Goldman Sachs. The news came just over a month after WMG competitor Universal Music Group (UMG) finalized plans to sell 10% of its equity to a group led by Tencent Holdings, in a deal that valued the music company at $33.6 billion.

WMG, which had been a public company a decade ago, was purchased by Len Blavatnik’s Access Industries in 2011 for $3.283 billion, and it’s thought to be worth far more now, at a time when the valuations of recording and publishing catalogs are rising across the board. The smallest of the three major labels, WMG owns the recordings of artists from Coldplay to Cardi B, and Madonna to Michael Bublé, as well as the Warner Chappell publishing company. (The company’s S-1 filing also shows that WMG has an investment in Tencent, as well as a controlling stake in the streaming service Deezer, which is popular in Europe.) In WMG’s most recent fiscal year, which ended Sept. 30, 2019, the company posted $256 million in net income on revenue of $4.48 billion, up 11.7% from revenue of $4 billion in 2018.

Billboard estimates that WMG will be valued between $15 billion and $16 billion on the top end, and between $10 billion to $12 billion on the bottom end. (A Wall Street analyst who requested anonymity agrees with this estimated valuation of the stock offering.)

After its brush with death a decade ago, the recorded-music business has been making a comeback, largely fueled by revenue from subscription streaming services like Spotify and Apple Music. In the United States, recorded music revenue hovered around $7 billion from 2011 through 2015, according to the RIAA, then grew by 11.4% in 2016, 16.5% in 2017 and 12% in 2018, to $9.8 billion. Wall Street analysts have adjusted their valuations accordingly, and Goldman Sachs analyst Lisa Yang has projected that the global recorded-music business will double in size in a decade.

As a result, the multiples that music assets trade for have skyrocketed. In August 2017, Goldman Sachs valued UMG, the world’s largest music company, at $23.5 billion -- five times what it was thought to be worth in 2013, but just over $10 billion less than the valuation it received in the Tencent deal. That deal, which values UMG at a record-setting multiple of 31 times its EBITDA (earnings before interest, taxes, depreciation and amortization), may have inspired Access to explore its options for WMG. On WMG’s most recent earnings call, CFO Eric Levin implied that the company was in the process of recalculating its valuation, in order to revise a long-term incentive plan for senior management.

Whatever the ultimate valuation of WMG, it’s clear that Access and Blavatnik got a great deal. Since 2011, WMG has paid out dividends totaling $1.35 billion, and Access has been paid $90.2 million for managing its WMG investment and consulting on the company’s acquisitions -- for a total of $1.37 billion. That means Access has already taken in some $300 million in profit, with billions more to follow if investors buy into the initial public offering.

It’s also possible that filing for an IPO could be a way for Access to get a valuation for WMG if corporate suitors are interested in buying it. In the weeks before the music company announced it was planning a stock offering, there were rumors that a Middle Eastern investment group had made Access an offer for it. Although sources said a deal was in the works, the identity of the suitor was less clear, although there was agreement that it came from the development fund of a country in the Middle East. (Three days before the IPO was announced, a WMG spokesman declined to comment on those rumors.) If there is a potential buyer, however, the IPO process will establish a valuation for the company. “Going through the motions of doing a stock offering is a classic [mergers and acquisitions] tactic to line up a stalking horse to help set pricing,” says a Wall Street investor.

WMG was owned by Time Warner until 2004, when a consortium led by Edgar Bronfman Jr. bought the company for $2.6 billion. Two years later, the company went public for the first time -- Jimmy Page appeared at the New York Stock Exchange to play “Whole Lotta Love” at the opening bell -- at a value of $3.9 billion. Five years later, Blavatnik’s Access bought it for $3.3 billion.

With the rising valuations of music assets, now could be a good time for Access, and Blavatnik, to take some money off the table. At the same time, Blavatnik seems to want to maintain some control over the company. The filing outlines Blavatnik’s plans to issue himself and other insiders new Class B shares that will have 20 times the voting power of the Class A shares available in the IPO. That means WMG won’t have to adopt all the standard forms of public company governance, like bringing in outside independent directors to sit on the company’s board.

That kind of control could alienate potential investors, however, especially some institutional investors who don’t normally take stakes in companies where insiders have so much control. (Some stock indexes, like the S&P 500, exclude companies with multiple classes of common stock.) At the same time, such a structure could provide executives and artists with the kind of management continuity that could make it more competitive.

Control isn’t the only challenge a potential IPO will face. WMG has nearly $3 billion in debt -- up from $2.217 billion when Access bought it in 2011 -- and its filing notes that the structure of its existing debt and a revolving credit facility gives it the ability to borrow more. So while the company says it plans to pay dividends regularly, potential investors could have concerns about how debt payments could affect that.

“A valid question for shareholders to ask is, ‘Is WMG going to pay down debt or pay dividends?’ ” says a Wall Street analyst who didn’t want to be identified. He estimates it could take WMG a decade to pay off its debt.

Whatever happens with the IPO, a process that results in a high valuation for WMG has the potential to raise the valuations of all music assets. It could also inspire more asset sales, as other investors who bought into the business years ago decide it’s a good time to take profits -- and a rise in valuations inspires more investment in general.

This article originally appeared in the Feb. 15, 2020 issue of Billboard.