Loss rings a sour note for Warner Music

By Andrew Edgecliffe-Johnson /Financial Times 02/18/11

Shares in Warner Music tumbled on Tuesday as its eighth successive quarterly net loss damped investors’ hopes of a possible sale or merger for the US group behind stars such as CeeLo Green and Bruno Mars.

Revenues for the first fiscal quarter, which includes the peak holiday shopping season, dropped 14 per cent to $789m, as net losses rose 13 per cent from $16m to $18m, or from 11 cents to 12 cents per share.

A $179m cash outflow, driven by investments in new recording artists and additional music publishing catalogues, hit cash reserves by 40 per cent, while net debt was little changed at $1.94bn. In a regulatory filing, Warner said it was “highly leveraged” but had sufficient cash to make scheduled interest payments.

Analysts expressed disappointment at weak digital revenue growth of just 2 per cent, which Edgar Bronfman Jr, chief executive, attributed to further declines in sales of mobile phone ringtones and a series of new releases which he confessed “did not entirely meet our expectations”.

Laura Martin, an analyst with Needham & Company, was disappointed that Mr Bronfman declined to comment on the group’s decision to appoint Goldman Sachs to examine options. These range from a sale of all or part of the company to a bid for all or part of EMI, the UK rival which fell into the hands of Citigroup last week.

Shares in Warner Music were down 11.4 per cent at $5.52 by noon in New York, erasing much of their gain since news of Goldman’s appointment emerged last month.

Mr Bronfman also declined to comment on the tax position of its two divisions. Ms Martin, who rates Warner’s shares a “buy” with a target of $8.50, said it may make it harder to fund an EMI bid by selling the Warner-Chappell music publishing business, which she estimated could fetch $2bn.

Warner executives acknowledged that digital downloads had become “more mature”, particularly in the US, but said digital revenue growth would have been closer to 7 per cent were it not for the end of the ringtone craze.

Mr Bronfman would not comment on the company’s negotiations with Spotify, which has Sony Music’s agreement to bring its streaming service from Europe to the US but needs that of all four major music companies to proceed.

However, Mr Bronfman said the growth of such streaming services and the expected introduction of cloud-based music offerings such as those Apple and Google have been working on would produce stronger digital results this year.

Mr Bronfman holds a 7 per cent stake in Warner, with private equity backers Thomas H Lee, Bain Capital and Providence Equity Partners, holding almost 60 per cent of the company.

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