February 10, 2020

Breakingviews: Warner Music spins an IPO chart-topper

by Breakingviews.

Record labels are whistling a new tune. Warner Music filed to go public on Thursday hoping to ride the growth of streaming music. Based on other deals, it could be worth as much as seven times the $3.3 billion Len Blavatnik paid for it, including debt, in 2011. But the influence of the controlling shareholder may mute its popularity.

Warner has roots dating back to 1811 and claims the works of musicians from Beethoven to Lizzo. But when Blavatnik’s Access Industries swooped in nearly a decade ago, the company was a bit wobbly. The purchase price was less than half of the $17 a share it fetched when it went public in 2005. Now Warner’s revenue has grown 12% in each of the prior two years to $4.5 billion in 2019, when profit topped $250 million.

The rise of Spotify Technology and other services from Apple and Amazon.com is helping. Artists like Warner’s Cardi B and Led Zeppelin may not be selling CDs, but streaming subscriptions are booming. According to IFPI, streaming generated nearly half of the $19 billion in global revenue for the recorded music industry in 2018.

Finding a suitable public comparison for Warner is tricky. Spotify is worth $28 billion but it’s a platform and customer of Warner’s, not a direct competitor. The same is true for the $32 billion Sirius XM, which bought streaming outfit Pandora last year. Tencent Music Entertainment, which has a market capitalization of $23 billion, is not quite right either, given the unique aspects of the Chinese market.

Perhaps the best benchmark is Vivendi’s recent sale of part of its Universal Music unit. Tencent led a consortium of buyers for a 10% stake that valued the label behind Lady Gaga at around $33 billion. That represents over 30 times Universal’s potential 2019 EBITDA of roughly $1 billion, doubling its reported figure for January to June. Apply a similar metric to Warner Music, which made $737 million in EBITDA last year, and the enterprise value would be a whopping $23 billion.

That feels pricey. And there’s another caveat: French tycoon Vincent Bollore keeps a tight grip on Vivendi, and Blavatnik’s group is seeking the same at Warner with supervoting shares. A controlling owner could hold the company back from hitting the top of the charts.

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