Dealwatch: EMI, Warner Music

Terra Firma announced its take-private for the ailing label May 21, valuing the target at a lofty £2.4 billion. The figure seemed to be inflated, The Deal's Richard Morgan pointed out, ringing in at a hefty 265 pence per share, well above EMI's second-sweetest 220 pence per share offer of late:

"As a financial player, you can't pay 25 times [forward Ebitda] for recorded music," says an industry veteran who, like others, thinks Terra Firma's enthusiasm for EMI was miscalculated if not misplaced. It's this veteran's view, in fact, that an "oh my gosh" moment had to have accompanied Terra Firma's realization that the second-highest offer EMI received during its most recent batch of solicitations came in at 220 pence.

That the forward multiple the industry veteran attaches to Terra Firma's offer is so much greater than the 18.5 times Ebitda that EMI estimates for the company's most recent year reflects deteriorating financials across the industry. The recorded music side has been hit the hardest, with EMI Music revenue plunging 15% last year.

The trend is so dire it will ultimately force EMI's recorded music division into the hands of a strategic partner rather than a financial sponsor.

THIS TIME AROUND

The ultimate outcome remains to be seen. EMI agreed to the Terra Firma takeover nearly three months after a bid from Warner Music came and went. When the music publisher unveiled its plans to go private, investors bid up the company's shares suggesting EMI's ongoing game of cat and mouse with would-be buyers wasn't likely over. Geneva-based Corvus Capital Inc. took itself out of the running, while its one-time bid partner Fifield -- who had at least once before launched a takeover attempt for it -- said two days later he was still interested in pursuing an offer. News of a possible takeover, this time around, first surfaced in early May. At the time, the London music publisher didn't name names, but the Financial Times said May 4, without citing sources, that J.P. Morgan Chase & Co. affiliate One Equity Partners LLC had put forth a £3 billion ($6 billion) offer. After years of annulled mergers and failed bids, the timeless battle to become the world's top music publisher wages on.

EMI said Feb. 20 it had received another bid from Warner Music, thus renewing their years-long dance around a merger in the $4.6 billion ballpark. Two weeks later, EMI rejected the $4.1 billion advance, citing an environment of "regulatory uncertainty" and a level of "unacceptable operational risk."

Any future attempt to join forces will still come under regulatory scrutiny, like the Sony Corp.-Bertelsmann AG joint venture, which was reaffirmed by the EC Oct. 2, a week ahead of schedule, more than a year after regulators made history to annul their approval of the venture issued two years earlier.

The February news came two months after weeks of speculation were set to rest Dec. 14, when EMI said it was no longer in talks with an unidentified suitor, while reports pegged the bidder to be Permira, which reportedly offered $5 billion for the music publishing giant, but was refused. The Financial Times reported Nov. 28 that EMI had received a preliminary takeover approach from prospective suitors, and bidders were believed to include Kohlberg Kravis Roberts & Co. and Goldman Sachs & Co. The company confirmed at the time it had, indeed, received an approach, but would release further details as required.

Indeed, The Deal's Phineas Lambert pointed out March 2, the target could have been hoping for a white knight, possibly in the form of a private equity bidder.

GOT 'EM

Meanwhile, Viacom Inc. sold its Famous Music LLC publishing business June 1, which was founded in 1928 to publish music from movies, to Sony/ATV Music Publishing for about $400 million. The buyer is a joint venture between Sony Corp. and trusts formed by Michael Jackson. The faded King of Pop in 2006 announced he may sell half of his 50% stake in Sony/ATV Music Publishing LLC to Sony, which would give the Japanese company 75% of the venture, which includes the prized, billion-dollar Beatles catalog in a move to fend of bankruptcy.

In September 2006, Vivendi SA beat out several bidders to acquire the Bertelsmann AG's BMG Music Publishing division with a $2.1 billion bid to become the world's largest music publisher with 25.6% market share, surpassing EMI. The deal passed regulatory muster  in May 2007.

A LONG, STRANGE TRIP

But back, again, to the EMI and Warner Music tale.

In September 2006, Bronfman approached EMI investors about a possible tie-up, a published report said, two months after EMI abandoned its then-latest pursuit of the peer.

• EMI said in July 2006 it would hold off on pursuing Warner Music, but, of course, that it could change its position based on developments.
• EMI's announcement to throw in the towel came one month after the last twist in the saga. The London-based recording titan flat-out rejected a $4.6 billion bid from Warner, June 28, 2006 which looked like it would position the courtship to drag on, still.
• The month before, EMI put forth a bid for Warner Music totaling $4.23 billion, which was rejected, and -- down-but-not-out -- the company stubbornly vowed to persevere. In mid-June, the company raised its offer and was once-again shot down.

Now able to stand on its own after suffering along with the entire recording industry through sales slumps the last few years, it seems like Warner Music doesn't need to revisit its hot potato days of old. M&A buzz and activity has swirled around the giant and rival EMI since 2000.

• Two merger attempts for EMI between 2000 and 2001, first with Warner Music Group and then with Sony BMG Music Entertainment, along with a rash of bad decisions contributed to sending its stock price plummeting from around 800 pence to roughly 170 pence in two years.
• In September 2003, EMI said publicly it was wooing Warner Music for the second time after months of speculation by Dealwatchers. A source put the price tag then at roughly $1.5 billion, with $1 billion cash, EMI stock and a 25% minority stake for WMG in a combined entity. At the time, Warner Music was in talks with BMG that centered on a 50-50 joint venture on the recorded music side.
• AOL Time Warner sold the music division the following year for $2.6 billion to Bronfman, TH Lee, Bain and Providence amid reaction that it undervalued the asset from vocal shareholder Carl Icahn.
• Bronfman and friends then took Warner Music public in May 2005. Then-popular rap outfit Linkin Park sued the company in connection with the debut.

It seems the crew wasn't too busy to get some dealmaking done. Several players negotiated small stakes in YouTube through video and music licensing deals announced shortly before the video-sharing site's $1.65 billion sale to Google was announced. The deals collectively will net the publishers $50 million, the New York Times later reported in October 2006, citing sources. --Carolyn Murphy