Sunday, 13 February 2011

Why would anyone want to buy a record company?

The following brief item appeared in Music Week on February 11th.

Warner Music Group is reportedly asking bidders to submit their first offers for all or part of the company by the end of February – before the recorded music and music publishing assets of rival EMI are formally put on the market.

However, Citigroup is also moving quickly to sell off EMI and is readying the music group for sale in short order. Timing is important, as potantial bidders for the two companies would doubtlessly be affected by the presence of another music major on the market at the same time.

More than 20 parties have been reportedly shown interest in Warner so far, including Zomba founder Clive Calder and Russian investor, Leonard Blavatnik, Universal Music, Sony Music, private-equity giants KKR, Apollo and Providence Equity, and independent publishers giant Imagem.

Beneath the piece is a comment from a reader of the piece who is clearly not enamoured with the music industry from an investment perspective.
The gist of the remark is as follows:

The thing is who is the genius that would purchase a music company these days? Nobody, not even someone who can afford to waste money.

Citigroup is certainly hoping that it can find a buyer for EMI Music which it now has to sell following its much publicized falling out with Guy Hands and Terra Firma.

As another article noted - "What did Terra Firma get out of the deal? When all is said and done, it looks like Terra Firma paid a whopping 1.6 billion pounds to rent EMI for three and a half years."

After seizing control of EMI after Terra Firm was in breach of loan covenants and in no position to keep funding the company, Citigroup have written down the debt that it is owed from £3.4bn to £1.2bn - translating into a loss of £2.2bn, which in the big scheme of things is no big deal for a bank which must have written down hundreds of billions (at least) in even dodgier investments in CDO's and other exotic instruments.

At this point Citigroup's effort to emerge from its calamitous EMI venture has to rely on two possibilities.

Either it can find someone dumb enough to pay real cash (as opposed to structured notes which may or may not be worth anything in the fullness of time) for the company in an upcoming auction or it needs to find someone smart enough - who has a radically new business model for the company. In the latter case it is best to contemplate that EMI is essentially a business involved in digital rights management rather than one beholden to the traditional making of discs and antiquated A&R/marketing and accounting practices that flourished yesteryear but are totally obsolete today.

There are some early indications that Citigroup might just find itself lucky enough that an innovative group currently traveling incognito could provide a suitable exit for the bank. On the other hand the dumb money option could also be a possible exit as Guy Hands has indicated that he might have another go at acquiring the company.

As is often said, some things are so bizarre you simply cannot make them up.

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