WHAT: Warner Music Group’s pre-emptive bid by far beat the nearest competitor to win the auction for Parlophone, home to Coldplay and Pink Floyd. It has agreed to pay £487 million ($762 million) to Universal Music Group, which had to sell the label and other assets in order to win regulatory approval from the European Union for its own purchase of EMI Recorded Music. According to sources, Parlophone, which includes Chrysalis and the Ensign label, generated about $105 million in earnings before interest, taxes, depreciation and amortization on about $400 million in revenue last year. Sources indicate the next-highest bid was $550 million.
WHY: Did Access Industries’ Len Blavatnik, who’s known for disciplined investments, overpay? Some sources suggest he had to absolutely win Parlophone and needed to make a statement after losing the auction for all of EMI Music when UMG bid £1.2 billion ($1.9 billion) and he wouldn’t budge from his $1.5 billion bid. This time out, some may suggest that Blavatnik overpaid for Parlophone, but that bid is slightly more than a six-times-multiple, while UMG said its £1.2 billion EMI acquisition came out to a seven-times-multiple for all of EMI’s recorded-music operations. But other sources suggest Blavatnik got the part of EMI that he really wanted, which has been the prime A&R mover of EMI’s current market share during the last 10 years. The goal for WMG and UMG in both cases is to reduce the multiple to about four-times through cost savings from combining operations.
WHO: If anyone thought billionaire Blavatnik was a missing-in-action owner of his latest toy, Warner Music, this deal serves as the final notice that the new owner plans to shake up the music industry -- in case you didn’t get the message when he wrote a $3.3 billion check to buy WMG, then OK’d the exit of Lyor Cohen as Warner’s recorded-music CEO in September, followed that up by making a $130 million investment for a minority stake in Deezer through Access Industries and hired company-building Rob Wiesenthal as COO.
IF:WMG has said it will use a new term loan to pay for Parlophone, so if it doesn’t put in any equity, and can get the new debt at 4.5% interest, that means it will add another $34.4 million in interest payments to the $185 million it pays annually on its $2.2 billion in debt. Adding another $30 million in annual principal payment that’s required by one of its loans, that comes to $249 million in interest payments and debt reduction annually. Meanwhile, its operating income before interest, taxes, depreciation and amortization was about $353 million last year, plus another $105 million from Parlophone and whatever other cost savings it achieves from merging it with WMG’s European operation. Assuming it will get to $500 million this year, that’s a 2-to-1 coverage, which is a ratio investors like to see.