The Warner Music Group has begun the process of divesting of some of its artist and catalog holdings to accommodate a deal it made with indie trade organizations Impala and Merlin when it acquired Parlophone Records last February, according to sources.
When WMG agreed to pay 487 million pounds (then about $765 million) for Parlophone in Feb. 2013, it had already struck a deal with the two European-based indie trade groups that it would sell, license or reach distribution agreements with indie labels for WMG assets with revenue equivalent to about 25%-33% of Parlophone's total sales. Impala and Merlin's endorsements of the Parlophone acquisition were considered essential in gaining EU regulatory approval.
At first glance, the proceedings appear to be the industry's deal of the century: indie labels can express interest in any artist on the list, which is thousands of pages long and includes major groups like Iggy & the Stooges, the Talking Heads, the Pretenders and Black Sabbath. The reality is, however, that it is unlikely WMG will part with any of its crown jewels -- those critically acclaimed and/or financially rewarding. Moreover, sources say the amount of assets ultimately divested is based on a complex formula, so that in the end, WMG may wind up parting with less than one-third of the value of the Parlophone deal.
As one source put it, "It's just a complete list; certainly not everything on it is available for sale." So while those looking over the entire catalog can salivate over the list's trophy properties, Warner Music ultimately controls what assets it will choose to sell or make available through licensing or distribution deals.
The move to put up its entire catalog on an artist-by-artist basis is a unique way to comply with promises WMG made to get regulatory approval for the Parlophone acquisition. When UMG bought EMI, its divestment process to gain regulatory approval consisted of selling off labels like Parlophone, Sanctuary and Mute. Likewise, when Sony/ATV was a part of the consortium to buy EMI Music Publishing, it agreed to sell off the Virgin Music Publishing catalog as well as choosing some individual songwriter to add to the mix.
In the WMG process, indie labels had until last Friday (Feb. 28) to notify WMG which catalogs they were interested in bidding on and explain why. The latter is an essential ingredient in how WMG will decide which assets will be divested, as the music company wants to make sure the deals make sense for the artists. "There will be careful negotiations to make sure that artists go to the right home," said a source.
Sources say the auction so far has produced dozens of suitors as well as proposals that also include licensing deals in addition to asset purchases. In order to be eligible indie labels or distributors had to be members of either Merlin or Impala at the time the deal was struck with WMG, sources say.
While WMG has made an artist list thousands of pages long, "you can be sure WMG will use their own judgment as to what they will get rid of to fulfill its promise to Impala and Merlin," said an indie label executive.
In initial discussions concerning which artists or label catalogs might be divested, Merlin and Impala likely weren't able to predict which artists its members might bid on which is why the entire WMG catalog is now being listed.
In order to insure a fair process, Impala and Merlin have hired former International Federation of the Phonographic Industry (IFPI) head honcho John Kennedy, who is now affiliated with the Belgium Maximus Agency, to broker the process, which likeliy will run to at least September and could continue through the rest of this year. As part of the process, WMG has created a virtual data room where eventually artist data will be made accessible to suitors. While WMG is trying to be as transparent as possible throughout the process, potential bidders will likely only get to see the data that pertains to the artist they are seeking to acquire.
Sources suggested pricing for the deals will be decided through negotiations and auctions but bidders were considering certain guidelines to determine initial bids. So for asset sales, pricing parameters might use a measure of about 1.65-1.75 times annual sales of an artist catalog; or measured against 7 times gross profit, sources say.
At the same time Warner wants to receive the same valuation for its asset sales that it paid when buying Parlophone. And higher prices could be achieved if more than one suitor bids on assets that WMG is willing to sell.
WMG sees the auction as part of a long-term relationship with the indie community, which is essential to its growth strategy and why it has companies like the Alternative Distribution Alliance, which counts many independent labels among its client base.
"The agreement with Warner is designed to substantially strengthen the independent sector," said Charles Caldas and Helen Smith in a joint comment to Billboard. "The process which commenced on Friday will see assets divested which reflect the quality of the PLG assets, and will include opportunities for our members to acquire meaningful repertoire. This agreement will deliver additional collective market share to our independent members. This groundbreaking process will see a commercially significant reinforcement of the independent sector."
Indie labels say that the licensing and distribution terms are generous. For example, a licensing deal doesn't require advances, just royalty payments in the case of the former. Moreover, WMG is also believed to be helping arrange financing, although as one indie put it, "if I need WMG to help me finance a deal, then I probably shouldn't be looking to purchase anything at all."