Warner Music IPO ?

"A lawyer with a briefcase can steal more than a thousand men with guns."     –Mario Puzo

Who in their right minds wants to buy a piece of Warner Music Group?

Answer: Somebody must, because next month, a $4 billion IPO is going to occur.


A WSJ article last week observed that "Edgar Bronfman’s group acquired a legendary company [Warner Music] that
includes the Atlantic and Warner Bros. labels, and Warner/Chappell
Music Publishing. But the new owners have raised eyebrows in the music
industry with their aggressive cost cuts, reductions in the artist
rosters and the quick move to reap financial benefits from the company."

The IPO will allow insiders to reap an enormous $329.4 million cash windfall. "According to a document filed yesterday with the Securities and Exchange Commission. Meanwhile, only about $7 million of the planned $750 million IPO will be put toward Warner Music’s own operations." That seems amazingly abusive.

Think about this: A huge IPO goes out, the public puts money to work, and a mere $7 million dollars gos to towards operations, while insiders cash out 50 fold times more. And, its happening as Warner Music Group is under investigation (they just received another Subpoena from Eliot Spitzer’s office).  I find that simply astounding.

Even more ironic, this IPO is occurring just as the industry has started to trot out their phony moral arguments (Its just wrong!)  against P2P. It would be funny if it wasn’t so sad.

The Financial Times reports that "Goldman Sachs, Morgan Stanley,
Merrill Lynch, Lehman Brothers and Deutsche Bank have been selected to
underwrite the offering." I want to know this: Who are these banks
going to place these shares with? Insitutions are usually too savvy for
this sort of cash  out, and the public is pretty clued into the state of the industry. So who are the buyers? 

Here’s a disturbing WSJ excerpt: 

"A private-equity consortium led by Warner Music Chairman and Chief Executive Edgar Bronfman Jr. paid $2.6 billion to acquire Warner Music from Time Warner Inc. last year, and the group has moved quickly to ensure that the deal pays off for the investors. The new $329.4 million payout is to comprise $125 million raised by selling stock to the public; a large share of a new $141.5 million dividend disclosed in the SEC filing; and a $73 million "termination fee" related to a management agreement between the investors and Warner Music. The windfall would be separate from any profit the investors see as a result of an increase in Warner Music’s valuation after the IPO.

Mr. Bronfman, who owns 12.3% of the private-equity stake in the company through his investment vehicle, Music Capital Partners LP, stands to net $40.5 million of the total. On top of that, he will see an undisclosed share of a $10.1 million dividend payment that is earmarked for 10 of the company’s top managers who own restricted shares.

The new windfall will almost all come as profit, since the investor group, which also includes Thomas H. Lee Partners LP, Bain Capital LLC and Providence Equity Partners Inc., already has paid itself back almost all of the $1.25 billion in cash it put up to buy the company last year. That payout was made out of the company’s cash balance and by issuing high-interest bonds late last year.

All of this comes as Warner Music’s owners and managers hope to raise
$750 million from public investors, in a sale that people familiar with
the company have estimated would value it at around $4 billion. The
premium over last year’s $2.6 billion purchase price is noteworthy,
given the brutal condition of the music industry, which has been rocked
for five years by a host of problems, including digital piracy and
lackluster artist development. In the U.S., sales for the year are down
7% from a year earlier, according to data from Nielsen SoundScan.


Sure, the recording business is sufferring from Piracy. Not the industry standard P2P lament. Rather, a bunch of swashbucklers have invaded Warner Music, are about to strip it of all its booty, and will then hightail it across the Atlantic with their ill gotten gains.   

Avast ye swabs! There be Pirates about, mateys — the types that wear suits and ties . . .


At Warner Music, Investors Get Set To Reap Windfall
Ethan Smith
The Wall Street Journal, April 8, 2005; Page C4

Warner Music continues with IPO plans
Company expects to raise $1 billion from public offering
By James Politi and Aline van Duyn
FT, 4:23 p.m. ET March 8, 2005

Warner Music Group Receives Another Subpoena From Spitzer
Wall Street Journal Online, April 7, 2005 7:49 p.m.

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What's been said:

Discussions found on the web:
  1. Karmakin commented on Apr 12

    It’s actually pretty simple. The reason they’re not pumping a lot of money into the company?

    It would be bad money after the good. They have enough promotion money as it is. It’s already budgetted. It’s not like your standard IPO, where they can build another facility, or increase their server farm, or whatever. The last thing they’re going to do is use money to increase the size of their “farm” so to speak. That’s a joke.

    You have to realize the core business model for the music industry right now. They believe by ratcheting down the number of releases they make every year, they can squeeze all the current sales into less titles. Making them more money.

    The ego and hubris here is amazing. They’re culture pushers. That’s not a bad thing really, but that’s what they’re selling. Culture. And Culture has this little nasty habit of well…to steal the analogy from the open source crowd, it wants to be free. It wants to grow, and change, and flow with the hopes, dreams and emotions of the individuals of the public at large.

    And they believe they can control that by supporting less acts.

    So WMG doesn’t NEED more money. They don’t WANT it. That’s why. Not that I’m excusing it of course, but whatever. Who would buy that stock?

    These guys have absolutly no idea about the particular field they’re in.

    The culture field.

  2. Karmakin commented on Apr 12

    Just to reiterate one part that’s bugging me. When I mean “free” I don’t mean free as in beer, meaning price range. What I mean is that individuals are free and able to discover the culture that they love, and then be able to embrace it and reward it.

  3. Barry Ritholtz commented on Apr 12

    Which raises the question: Why go to the capital markets to do an IPO, if you don’t need additional capital?

    If the answer is solely to cash out on the heads of IPO share buyers, well, then, there’s something wrong with that.

  4. pat kelly commented on Apr 12

    private equity cash outs have become all too frequent of late, only people to blame are the investors that have made them possible.

    a company carves out existing cash, loads up on debt to issue additional dividends, business continues in perpetual decline…and the equity value increases?!!

    seriously, who buys this crap? if investors are up for the purchase now where were they 18 mos. ago before this thing went private?

  5. Karmakin commented on Apr 12

    Well, I’d also blame the media that puts forward stocks far too often as an almost sure thing…

    The thing is, a complete meltdown of the market system is very possible. All it takes of for society en masse to decide that stocks are not a good investment. If nobody’s buying, there’s not nearly enough profit coming from above to avoid a meltdown.

  6. David Jackson commented on Apr 13

    Why is a “cash-out” IPO wrong? Every asset has some value, and an IPO is simply a way of (a) providing liquidity to existing shareholders who don’t have a public market for their stock and (b) raising capital for companies that need it.

    If a company doesn’t need capital, is it wrong to go to the public market to create liquidity for the current shareholders? I don’t think so. That’s what free and liquid markets are about.

    Ask yourself this question: is there *any* price you would pay for stock in Warner Music? If the answer is “yes”, then you don’t object to the notion of a cash-out IPO, but rather the price this particular deal is going for.

    Speculation: most companies that complete IPOs don’t need the capital. They do it for the publicity (marketing) and liquidity. And the investment banks that do the deals generally don’t do them for the fees (the deal sizes are too small relative to the work) but for the promise of real capital raising (secondaries) and M&A down the road.

    A footnote: a cash out IPO would be wrong if a company requires capital but the insiders insist on selling their stock instead. But with Warner Music, the private equity guys have focused on paring down the business and reducing costs, and my sense is that that’s why the company doesn’t require further capital.

    Full disclosure: I don’t own stock in Warner Music or any of its competitors.

    David Jackson
    Internet Stock Blog

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