Stephen Foley: Warner's stock rises on Goldman Sachs hiring
Saturday 22 January 2011
US Outlook: Edgar Bronfman Jr has already made a start trying raising the money to pay his €5m (£4.2m) fine for insider trading.
The Warner Music chairman stands to win a $5.8m bonus if he can push the record company's shares over $7, and yesterday the stock leapt 25 per cent to almost $6. The reason? News that the company has hired Goldman Sachs to explore a sale of some or all the business.
One way or another, we are nearing the day when Warner and EMI combine, getting to work on slashing costs and squeezing the only big profits on the horizon in the recorded music industry.
A full sale of the company would allow Warner's majority private equity owners to belatedly cash out, but they are also considering a sale only of the music publishing arm. After all, why let the cost savings from bolting EMI and Warner together fall to another?
Music publishing is the bankable bit, attractive to bidders such as KKR, which made an early approach and which is hoping to bulk up a joint venture it created last year with Bertelsmann. Music publishing squeezes revenues from the rights to old songs, with none of the risks of discovering, recording and promoting new music. EMI and Warner's music publishing arms together would inevitably attract a competition inquiry, something that has complicated a merger for the best part of a decade.
EMI, acquired by Terra Firma in 2007, will default on its banking covenants in March and Citigroup is now in de facto control of its fate. All the signs are that the bank wants shot of the business as soon as possible, yet there has been no progress on a deal with Warner. Citigroup would most likely dismiss out of hand a bid that is contingent on competition approval.
Warner too has decided it cannot wait around for EMI to solve the competition conundrum for itself.
Despite a creative approach to packaging and marketing digital music, and despite winning market share thanks to new artists like Bruno Mars and old bankers like Linkin Park, Warner's results have proved relentlessly disappointing. And there is no sign of a turnaround for the industry, either. The No 1 album in the US this week, Cake's new release Showroom of Compassion, is the lowest-selling chart topper of all time.
This is not even nearly the beginning of the end of the decline of CD sales and there is no sign that tech-savvy digital consumers will start to pay for music again. Status quo has no fans here.
It seems the main motive of Warner's Goldman hire is to stir the pot, bounce some people into action, and to force EMI into a deal. With a second, more attractive music company now on the auction block luring away potential bidders, Citigroup's options for EMI look like they just narrowed.
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