Sony Music Entertainment's pending acquisition of The Orchard will make the major label the parent company of two of the largest independent distributors.
Sony previously acquired a majority stake in the company back in 2012. On the front-end of that deal, sources say The Orchard was carrying about a $100 to $105 million valuation. Billboard estimates that Sony paid $50-55 million in a combination of cash and equity, with the latter coming in the form of IODA, another digital distributor that Sony had acquired, which was subsequently merged into the Orchard. In exchange Sony received what sources say was a 51% stake in the Orchard.
"We have been in business with The Orchard and Brad [Navin, Orchard CEO] for three years, and this deal is the culmination of that relationship," says Dennis Kooker, Sony Music Entertainment's president of global digital business and U.S. sales. "It's a great business and a great team, with strong growth potential and a smart strategy."
According to Sony Corp.'s quarterly financial filings with the SEC, the company has agreed to pay $200 million for the remaining 49% The Orchard, valuing the company at $392 million. In buying The Orchard, Sony is not only getting one of the biggest and best indie distributors, its also gaining a company with diversified capabilities.
The deal will require regulatory approval, which will push the close of the deal back several months.
Sony also owns RED, giving it about 6% of the U.S. indie distribution market. (RED's market share is currently 4.02%, but over the last two years has averaged a 4.6% share, while The Orchard's sits around 1.57%, averaging roughly 1.8% over the last two years.) Kooker adds that The Orchard is "very complementary to [Sony Music Entertainment's] overall business."
The Orchard will continue to operate separately from Sony Music and will continue to be led by its existing executive team, according to Kooker. But the deal will also allow the companies to work more closely, driving improvements throughout the digital supply chain and quality of revenue reporting, the company says, with the overall goal of improving revenue and profitability for its distribution clients.
In announcing the proposed deal, Sony Music Entertainment said the deal is aligned with Sony Corp.'s recently announced strategy targeting Sony Music as one of its growth businesses.
The Orchard has a notable global footprint, operating in 25 markets around the world. Started as a digital distro, the company added physical distribution provides label marketing services as it grew. Moreover, the company's in-house capabilities include publishing royalty administration for its labels. Billboard estimates The Orchard's annual revenues to be over $200 million.
"We have built leading services around our distribution platform and will add more services to benefit our clients as the shift to streaming adds complexity to their businesses." Navin says. "We have a lot of exciting work ahead of us and a lot of runway for continued growth across music and film."
In addition, the company is a growing force in master recording ownership, having recently acquired the Blind Pig catalog, which includes includes albums by Muddy Waters, Magic Slim, Popa Chubby, Charlie Musselwhite, Bill Perry, James Cotton and Otis Clay. While terms of the Blind Pig acquisition were not revealed, sources say the label had revenues of about $615,000 in 2013. Billboard estimates that The Orchard paid about $1.6 million for Blind Pig's catalog.
The Orchard also owns some of TVT's catalog as well as the catalogs of Frenchkiss Records, Discos Joey Records, Xanadu Records, and JDub Records.
The Orchard recently created a new division, headed by industry veteran Scott Ambrose Reilly, to acquire, rejuvenate and repackage acquired catalogs.
At the time of the Blind Pig acquisition Orchard chief operating officer Colleen Theis told Billboard "From time to time, when the opportunity presents itself, we will purchase assets. We understand the value of owning intellectual property."
Citigroup served as the financial advisor to Sony Music Entertainment on the transaction while UBS Securities, LLC advised The Orchard.