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KKR's BMG venture tunes into Bug Music

by Matt Miller | Published September 12, 2011 at 4:22 PM

BMG Rights Management GmbH, the aggressively acquisitive music-publishing joint venture between media behemoth Bertelsmann AG and Kohlberg Kravis Roberts & Co. LP, announced Monday, Sept. 12, it will acquire independent music publisher Bug Music Inc. Terms weren't disclosed.

Some media reports suggest the purchase price is in the neighborhood of $300 million, although given the current state of the market, that price tag is extremely generous.

Based in Los Angeles, Bug Music has been owned by Spectrum Equity Investors LP since 2006, after which the publisher began to buy up other independent publishers. By September 2008, Bug Music had made almost 20 acquisitions, most notably the 2007 purchase of Windswept Music Publishing, which more than doubled Bug Music's catalogue.

Spectrum put Bug Music on the block last year, but pulled the auction after the music publisher failed to gain the $300 million threshold the private equity concern sought. (According to one source, the highest bid was $250 million.)

After the failed auction, Bug Music bought for an undisclosed price the Saban Music Group catalogue, which includes theme songs from "Mighty Morphin Power Rangers" and "Teenage Mutant Ninja Turtles."

If the $300 million is correct, that would value the company at almost 12 times net publisher's share, the common industry metric. That is double the typical 5 to 6 times valuation for smaller publishers, and it comes at a time when demand for many catalogues on the market has dropped.

It's also a time of uncertainty. Music-related copyright laws were tightened in January 1978, and songs written that year are now subject to reversion to their creator.

So saying, the valuation isn't impossibly high, given the high quality of the holdings. "You really have to have the caliber of a Bug catalogue to get a 12 times factor," said Tamera Bennett, a Dallas-area lawyer who represents music rights holders.

BMG Rights Management is one of a small handful of publishers that continues to be active on the acquisition trail. "They don't have any trouble spending their money," said Bennett.

Berlin-based BMG, 51% owned by KKR, was formed in 2009. The prior year Bertelsmann had all but abandoned music, selling its 50% stake in the Sony-BMG Music Entertainment joint venture to Sony Corp. for $900 million.

This would mark BMG Rights Management's largest deal yet. It made five acquisitions last year, most notably the late November purchase of publicly traded British publisher Chrysalis plc for £107.4 million ($170 million at the time). With the Bug Music deal, BMG Rights Management controls around 600,000 titles, which would elevate its position toward the four major groups: leader Universal Music Group, EMI Group plc, Warner/Chappell Music Inc. and Sony/ATV Music Publishing.

This time around, it isn't clear who else might have bid on Bug.

XIX Entertainment, Simon Fuller's gold-plated "American Idol"/"So You Think You Can Dance" franchise, declined to comment, although one source indicated XIX was initially interested, but in the end didn't make a bid.

Some media reports said Canada's Ole Music Publishing was in the mix. A spokesperson declined to comment.

Reports also mentioned Imagem Music, the major European independent publisher. André de Raaff, Imagem's group chief executive, didn't respond to an e-mail seeking comment, although in 2010 he said Bug Music wasn't worth nearly the asking price.

Bug Music owns or manages the copyrights for more than 250,000 titles. They include a raft of contemporary artists including Wilco, Kings of Leon and Bruno Mars. More importantly, Bug Music holds the rights to such perennials as "What a Wonderful World," "I've Got the World on a String" and "One World," to focus on just one theme. It also controls the estates of such legends as Johnny Cash, Woody Guthrie and Muddy Waters.

Music publishing is more predictable than the recording side of the business. Each time one of these songs is performed live, played on radio or recorded, the copyright holder gets a small fee.

Citigroup Inc. acted as financial adviser for BMG Rights Management, while J.P. Morgan advised Bug Music.

Manatt, Phelps & Phillips LLP was a legal adviser to BMG Rights Management, with Aydin Caginalp, Ken Kaufman, David Grinberg and Scott Schwartz leading.

Latham & Watkins LLP advised Bug Music. Scott Haber and Robert Burwell led.

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