BMG's Purchase of Bug Music Finds It Closing in on Majors
BMG's Purchase of Bug Music Finds It Closing in on Majors

There's been a persistent rumor about BMG Rights Management, the music publishing joint venture between German media giant Bertelsmann and private-equity firm Kohlberg, Kravis & Roberts: If it doesn't succeed in acquiring the publishing assets of either Warner Music Group (WMG) or EMI Group, KKR will exit the JV.

But BMG's acquisition of leading independent publisher Bug Music strongly suggests otherwise-not just because it comes in the middle of Citigroup's auction of EMI but also because Bug is a particularly prized catch. Make no mistake: This deal demonstrates that BMG is here to stay.

According to sources, Bug Music has annual revenue of about $80 million, with net publisher's share of about $31 million and about $20 million in earnings before interest, taxes, depreciation and amortization. That's up from the numbers the company had when it was shopped last year, when Billboard reported that Bug Music had annual revenue of about $70 million and an NPS of $26 million, with $14 million in EBITDA.

Once it completes its acquisition of Bug, Billboard estimates that BMG will boast annualized revenue of about $330 million. BMG is the fifth-largest music publisher in the world. Sony/ATV Music Publishing, the smallest of the four major music publishers, generates about $500 million in annual revenue.

BMG's deal to acquire Bug, which came through an auction run by J.P. Morgan, is set to close in October. While BMG didn't disclose what it is paying, sources say it will fork over $300 million in an all-cash deal to Bug owners Spectrum Equity Investors and Crossroads Media. Sources say other bidders in the Bug auction included Simon Fuller's XIX Entertainment and the London office of Australian financial firm Macquarie Group.

On Sept. 8, Bug CEO John Rudolph sued Bug in a California state court for breach of contract, alleging that the company is providing him with only a portion of the 2% equity stake in the company that he's owed. But the suit is unrelated to the BMG deal and isn't expected to affect its completion.

Last year, J.P. Morgan called off an auction for Bug after it failed to generate the desired $270 million-$300 million that Spectrum and Crossroads were then seeking.

This time around, Bug apparently benefited from three factors. One was stronger-than-expected investor interest in WMG. The Warner auction, which drew 10 bidders including BMG, was won by Access Industries, which bid $3.3 billion for the major-label group and completed the acquisition in July. Also boosting music asset valuations, financial executives say, are recent signs of further evolution in the digital market, with the U.S. launch of Spotify and the beta launches of cloud music services by Amazon, Google and Apple.

Finally, recent acquisitions also lifted Bug's value. Last October, it acquired the Saban Music Group catalog, which includes theme music from cartoons like "Mighty Morphin Power Rangers" and "Teenage Mutant Ninja Turtles." It also acquired Countdown Media, a supplier of cover music with a catalog of 150,000 recordings, which generates about $8 million in annual revenue, mainly through iTunes sales.

The Bug catalog also includes songs from such legends as Johnny Cash, Woody Guthrie, Del Shannon, Iggy Pop and Stevie Ray Vaughan, as well as contemporary stars like Kings of Leon, Ryan Adams and Wilco. The company also is a JV owner of Kara DioGuardi's Arthouse Entertainment, which has a roster that includes songwriters Jeff Cohen, Mike Elizondo and James Poyser.

Bug represents the latest feather in the cap of hyper-acquisitive BMG and its CEO Hartwig Masuch, as well as the company's first significant acquisition of 2011. From mid-2009 through the end of 2010, BMG acquired Crosstown Songs America, Stage Three Music, Cherry Lane Music Publishing, Evergreen Copyrights and Chrysalis, consolidating those acquisitions under the name of BMG Chrysalis in the United States and the United Kingdom.

Meanwhile, sources say it remains in the hunt to buy EMI. Bids for the second round of that auction are due at the end of September.

While BMG and Bug Music executives decline to comment beyond the press release issued to announce the deal, the pending Bug acquisition is "an important deal for BMG," says David Grinberg, a partner and chairman of the mergers and acquisitions practice group at Manatt Phelps & Phillips, which served as BMG's legal adviser on the deal. "It makes them one of the top four or five companies in this area, which is a tremendous accomplishment for the time they have been in business." He adds, "I don't think BMG are done."