KKR and other bidders circle Warner Music

By Andrew Edgecliffe-Johnson and Helen Thomas 1/21/11 Financial Times

Warner Music has been approached by Kohlberg Kravis Roberts and two other potential bidders for some or all of the US music group, according to two people familiar with the matter.

The early-stage discussions could lead to a disposal of the Warner-Chappell music publishing business which could in turn help finance a Warner bid for EMI, the British rival it has coveted for a decade, these people said. Alternatively, the discussions could lead to a full sale of Warner, which the buyer could then seek to combine with all or parts of EMI.

One person with direct knowledge of bidders’ proposals said that a full sale was not under discussion, and that most of the interest from potential buyers was focused on Warner’s publishing business and its older recordings, which include Frank Sinatra’s catalogue.

Recent bids for smaller music publishing catalogues suggest that Warner-Chappell, could fetch $2bn to $2.5bn, answering analysts’ questions about how Warner could afford EMI given the $1.51bn net debt it reported at the end of its last fiscal year. Warner reported a $145m net loss last year.

Warner has appointed Goldman Sachs to advise it on the approaches, people familiar with the matter said, confirming a report in the New York Times. They added that the company was also working with AGM Partners, a boutique advisory firm run by Alan Mnuchin which has worked before with Edgar Bronfman, Warner’s chief executive.

Warner Music, Goldman and KKR declined to comment and Mr Mnuchin could not be reached for comment.

The approaches come as Guy Hands, whose Terra Firma private equity group bought EMI for £4.2bn in 2007, is expected to lose control of the company to Citigroup, its sole lender. Barring unexpected concessions from the bank, EMI will pass into Citigroup’s hands in mid-July.

KKR, which has a smaller music publishing joint venture with Bertelsmann called BMG, has been preparing a possible bid for EMI for several months. BMG has expressed enthusiasm for both EMI’s publishing division and its recorded music back, which includes the master rights to The Beatles’ recordings.

Buying Warner as well would allow KKR to reap substantial cost savings from combining the two companies’ recorded music divisions, while giving them the scale to compete more closely with Vivendi’s Universal Music and Sony Music Entertainment, the market leaders.

However, any bidder could face regulatory challenges to combining EMI Music Publishing, the largest collection of song copyrights in the world, with Warner-Chappell, which manages songs ranging from “Happy Birthday To You” to hits by Madonna and Katy Perry.

The hit-and-miss business of developing new acts is more volatile, and may be less appealing to bidders. Private equity firms and pension funds such as ABP have concentrated on the publishing side of the music industry in the past five years because of its more predictable cash flows.

Analysts believe there are still hundreds of millions of dollars of costs to be saved from combining the recorded music arms of Warner and EMI. Such benefits could only be gained if a bidder managed to win two separate auctions, however.

Shares in Warner Music have fallen about 16 per cent to $4.72 over the past month, and are down from $14 a share since its initial public offering in 2005. The stock jumped 11.65 per cent in after-market trading on Thursday after the New York Times report.


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