It appears that Sony Corp. has triggered a clause in its co-ownership agreement of publishing giant Sony/ATV, which it shares with the Michael Jackson estate, that allows for either party to initiate a buyout of the other, signaling that the beleaguered multinational is looking to either sell its half of the Sony/ATV joint-venture ownership to the Michael Jackson estate or buy Jackson out. The reasons for the trigger remain mysterious, though a problematic relationship between the partners is an oft-cited rumor. Whatever the outcome, the finish line on any deal remains far in the distance. The news was first reported by the Wall Street Journal's Hannah Karp.
Speculation is rampant that this process will end with Sony/ATV on the auction block, but the process could end more simply, with one partner buying out the other and the sole owner living happily ever after.
“The buy-sell process has been initiated, and it hasn’t been determined yet among the two as to who the buyer and who the seller is,” says one source with knowledge of the proceedings. “What happens after the process, when one of them owns the entire company, is unknown at this point.” Sony declined a request for comment.
Of the two partners, its more probable that Sony will buy out the Michael Jackson estate (the "ATV" in Sony/ATV) than the reverse. While administrators John Branca and John McClain have returned the Jackson estate to solid financial footing, it's likely that Jackson's heirs would prefer to sell their stake in the company.
Sony/ATV has an approximate valuation of $1.5 billion, and its 39 percent stake -- 29 percent for Sony, 10 percent for the Jackson estate -- in EMI Music Publishing was valued at $860 million at the time of its $2.2 billion acquisition in July 2012. The current process only impacts Sony/ATV proper, not its stake in EMI, according to sources. The EMI catalog has a separate group ownership, composed of Sony Corporation of America, the Estate of Michael Jackson, Mubadala Development Company PJSC, Jynwel Capital Limited, the Blackstone Group's GSO Capital Partners LP and David Geffen.
Now for some hypotheticals. If Sony does buy out the Jackson heirs, what’s next? Would it put it up for sale or once it has ended a complicated ownership structure? Or does it embrace and nurture it?
In its most recent fiscal year ended March 31, 2015, Sony/ATV produced revenues of 70.96 billion yen, or about $593 million, up from $559 million on a constant currency basis.
The question of whether to sell Sony/ATV comes at a time when publishing assets, while still prized, no longer generate the lofty valuations of even three or four short years ago. Previously, publishing assets were selling for multiples of 12 to 13 times net of a publisher's share (also known as gross profit). Now, publishing assets typically trade on 10-12 times NPS, usually nearer to the lower figure.
Selling the company would, at least, spare Sony senior management any headaches around CEO Martin Bandier's succession -- replacing the executive, a deeply rooted industry legend, would not be an easy headhunt. It would also help pay down the parent Corp.'s corporate debt, easing a skittish market's concerns. But if Sony were to buy the Jackson estate out, it would give them complete control of an asset that might fetch a higher multiple a few years down the line, if streaming proves to be the savior of the music industry that many hope it will become.
If put on the block, the only strategic companies that could even afford to buy, and operate, the giant would be Warner Music Group, BMG, and Universal Music Group -- though the latter could face antitrust concerns. When Imagem came up for sale, there was a scarcity of buyers who could afford its $650 million price tag, ending in a busted auction.
One other industry player could afford Sony/ATV -- but would the EMI investors buy out the 38 percent stake that Sony/ATV owns, and then double down by buying Sony/ATV itself?
Other possibilities include a private equity firm snapping up the giant. Private firms have been known to value publishing assets due to the relative predictability of their revenue streams. Martin Bandier himself is also said to strongly desire owning Sony/ATV -- but could he align the financial backing from private equity to pull off such an acquisition in light of his age (73), and with no obvious successors in sight?
Bandier's two biggest proteges, Jody Gerson and Jon Platt, are now running, respectively, the Universal Music Publishing Group (with annual revenues of about $1 billion) and Warner/Chappell Music (with annual revenues of about $500 million), the latter having been appointed just this week. There are no executives at Sony/ATV who are thought ready to replace Bandier, although he has been grooming Guy Moot, who serves as Sony/ATV's president of U.K. and European creative.
When Gerson walked out the door about a year ago, Sony’s upper management were upset that Bandier failed to retain the respected executive.
Bandier attempted to assuage his employees following the Dec. rumors of a sale -- which bubbled up through the muck of the Sony hack -- writing in a memo to staff: “I have been advised by Sony Corporation that Sony/ATV is not for sale and I can well understand that given we have just had our best year ever both creatively and financially and without a doubt we are the world’s leading and best music publisher with more great things set to come over the next 12 months. Who wouldn’t want to own a company like that, including Sony Corporation?” At that time, however, sources told Billboard that Sony Corp. senior management hadn’t reached a final decision on Sony/ATV.
“Its more likely that Sony buys [out the Jackson estate],” says one knowledgeable source. “They already own a record company, and they seem to like that. Music publishing is a stable business and a good fit with a record label. Logically, you would think Sony is the long-term owner of Sony/ATV at the end of the day.”
As one source put it: "Its very fluid situation at this point."