View from City Road: PolyGram deal is sweet music

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The Independent Online
They shook their heads in pity when Thorn-EMI paid out pounds 510m and took on debt of pounds 50m for Richard Branson's Virgin Music Group last year. For a price equivalent to 40 times earnings Thorn got the Rolling Stones, Phil Collins and Genesis along with just pounds 3m of assets.

Madness? Thorn is having the last laugh. Far from diluting Thorn's earnings Virgin's profit contribution, which more than doubled to pounds 54m in the year to March, has actually enhanced them.

PolyGram's dollars 301m ( pounds 205m) deal to buy Motown, which has negative net worth of dollars 24m, could be just as lucrative. A tight-lipped PolyGram has made this impossible to judge but it says the deal will not dilute earnings.

The figures are equally startling. Deducting a claimed dollars 50m value for the Motown brand name implies that PolyGram is paying 1.87 times Motown's annual sales of dollars 134m.

No profit figures have yet been disclosed, but the exit multiple must be enormous even allowing for PolyGram's US tax losses and savings on payments to Motown for distribution and marketing rights.

PolyGram, unlike Thorn with Virgin, aims to give priority to expanding the Motown roster, which is a risky and expensive business. It also hopes to milk the Motown name in merchandise, TV, videos and films.

Because PolyGram is issuing shares to help to pay for Motown the interesting flip-side of the purchase for financial markets is the way in which Philips, the struggling Dutch electronics giant, is relaxing its grip.

By allowing its stake to be cut from 79 to 75 per cent Philips is beginning to free the market in PolyGram shares. On Paribas' forecast of 14 per cent earnings growth this year the shares, after recent strong performance, are on a p/e of 17.5, or a 25 per cent premium to the Amsterdam stock market average, excluding Royal Dutch Shell. By Anglo-Saxon standards the shares are still good value.