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Music business shrinks from KKR

by Richard Morgan  |  Published February 26, 2013 at 8:15 AM
Much is being made of the anticipated withdrawal of Kohlberg Kravis Roberts & Co. LP from the joint venture BMG Rights Management GmbH.

Some observers speculate the JV's other partner, Bertelsmann AG, has been almost reckless by KKR standards in its hurried quest to snap up music assets. Others posit that because BMG Rights is entering its fourth year as a KKR portfolio company, any exit by the New York private equity firm is simply a matter of time.

But now, with the March 26 press conference at which Bertelsmann CEO Thomas Rabe is expected to announce BMG Rights' fate barely a month away, a more compelling reason for KKR's exit is coming into view. And to paraphrase Norma Desmond, KKR is big, it's the music business that got small.

"KKR likes writing checks between $1 billion and $2 billion," said a person familiar with dynamics of the BMG Rights JV. "That's the kind of money they like to put to work."

For KKR, with so many billions to invest, it's true that scale is no idle matter. And the notion that the private equity pioneer "values its time as much as anything," to quote the JV source again, means analyzing bigger investment plays is preferable to digging deep on smaller ones.

At the JV's outset, at least, the music business had several opportunities on the horizon to write big checks. Len Blavatnik's Access Industries Holdings LLC kicked off a run of major music deals by winning Warner Music Group Corp. in May 2011 with an all-cash bid of $3.3 billion.

Citigroup Inc., as the owner of EMI Group Ltd., extended the big-check era in November 2011 by selling that music company in two parts: Vivendi SA's Universal Music Group took EMI's recorded-music operations with a winning bid of $1.9 billion, whereas a consortium headed by a Sony Corp. joint venture with the estate of Michael Jackson -- Sony/ATV Music Publishing LLC -- won EMI's music-publishing division for $2.2 billion.

The big-check era even spilled into 2013, when earlier this month WMG paid $765 million for the Parlophone Label Group. This group consists of assets the European Commission had ordered UMG to offload in order to proceed with its acquisition of EMI Recorded Music.

From now on, though, any music deals will likely be minor by comparison. Or, as one source explained: "The big set pieces have already been moved. And for one reason or another, all the big opportunities KKR once saw in the music space were missed."

All the same, it's a dealmaking game that KKR partner Bertelsmann still wants very much to play. Although it owns only 49% of BMG Rights, leaving a 51% majority to KKR, Bertelsmann nonetheless guided the JV to victory in December with the acquisition of Virgin Music Publishing Cos. and Famous UK Music Publishing from EMI Music Publishing and Sony/ATV for an amount under $100 million.

The rock label Sanctuary was added to the BMG Rights mix this month via another EC-mandated sale that commanded $62.5 million. Bertelsmann is also known to be extremely keen on scooping up the jazz-dominated Concord Music Group that Village Roadshow Entertainment Group currently has up for auction.

But even the $125 million price that Village Roadshow has placed on Concord -- an amount many consider impossibly high based on music-industry metrics -- still isn't a big enough reason for KKR to stay.

Tags: Access Industries Holdings LLC | Bertelsmann AG | BMG Rights Management GmbH | Citigroup Inc. | Concord Music Group | EMI Group Ltd. | Famous UK Music Publishing | Kohlberg Kravis Roberts & Co. LP | Len Blavatnik | Michael Jackson | Norma Desmond | Parlophone Label Group | Sanctuary | Sony Corp. | Sony/ATV Music Publishing LLC | Thomas Rabe | Universal Music Group | Village Roadshow Entertainment Group | Virgin Music Publishing Cos. | Vivendi SA | Warner Music Group Corp.

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