Benom Plumb, Assistant Professor of Music Industry Studies at the University of Colorado Denver, reviews the biggest stories of the week affecting music royalties. He is a music industry professional, not an attorney. For more info about Benom, visit his website at www.professorplumbmusic.com.
Noise Grows Over Potential $3 Billion Sale of EMI Music Publishing (Music Business Worldwide)
Benom’s Take:
This year is shaping up to be very active in the world of music rights sales and acquisitions. If this week’s story about the potential sale of EMI Music Publishing is true, 2017 could be a watershed year for music asset purchases.
To fully appreciate this news and the next potential sale of EMI, a little bit of historical analysis should be in order. The history of the EMI catalog over the last 10 years has been chaotic. So the news of another potential EMI sale requires us to know where we’ve been and how we got here, today.
Imagine it’s late Spring of 2007. EMI has put both of its publishing and recorded music divisions on the auction block. There were several multi-billion dollar offers, but the winner of the EMI sale was private equity firm, Terra Firma, for $6.6 Billion.
I remember a friend of mine was at the EMI offices in Los Angeles for a job interview on the day the Terra Firma offer went public. My friend said the whole office mood went from a quiet and mellow pace, to a frantic running around... basically a full-on office “freak out”. It’s all anyone could talk about, “Did you hear? What’s going to happen to our jobs?” etc.
(Of course, the fears were justified as some folks did end up losing their jobs. Unfortunately, for many employees and creators at EMI, this workforce slashing got worse when EMI was sold again in 2012.)
The 2007 purchase of EMI turned out to be a disaster for Terra Firma and its leader, Guy Hands. For a fascinating analysis on the Terra Firma-EMI disaster, see the following articles from CBS News, “Terra Firma’s Purchase of EMI Hit All The Wrong Notes” and from The Wall Street Journal, “EMI Disaster Cost Terra Firma’s Guy Hands $230 Million in Personal Wealth”. From this analysis, we now know why it was such a disaster:
- The timing of the purchase was incredibly bad. Spring 2007 was the top of the financial bubble and when the crash hit in 2008 and 2009, so did EMI’s value. It’s estimated the investors in the Terra Firma purchase lost $2.8 billion on the deal.
- EMI was overvalued, burdened with debt, and Terra Firma overpaid. Terra Firma paid an 18x multiple on EMI’s cash flow, while continuing to add more debt to the EMI balance sheet after the purchase.
- Terra Firma underestimated the challenges of owning and reviving a music company in the new digital environment. EMI sales plunged after the Terra Firma purchase, primarily due to the unstable online market and steadily dropping album sales. Due to the uncertainty of EMI’s future, notable artists such as Paul McCartney and Radiohead also left EMI’s roster of artists. And of course, wrapped up in all of that, were leadership and management problems that kept EMI from getting back on track in the day-to-day operations.
- Guy Hands personally lost $230 million because of the deal. Ouch.
All that to say, Terra Firma essentially got “buyer’s remorse” and accused its lender, Citigroup, of “misleading” and “tricking” Terra Firma into buying the debt laden and struggling EMI. Terra Firma filed suit against Citi in 2010 and the debacle continued well into the 2016.
During all that drama, in 2011 EMI went back on the auction block. Its recorded music division was acquired by Universal Music Group for $1.9 billion, while the publishing division was acquired by Sony/ATV Music Publishing (along with many other investors) for $2.2 billion.
In that 2012 EMI Music Publishing purchase, Sony/ATV Music Publishing acquired 30% and the Michael Jackson Estate acquired 10% of EMI. Sony/ATV’s acquisition also included a long term administration agreement of the EMI publishing catalog through 2018. A conglomerate of investors including Mubadala Development Company, Jynwel Capital, Blackstone Group’s GSO Capital Partners LP and David Geffen acquired the remaining 60%. By 2014, Sony/ATV claimed to investors it had slashed EMI’s workforce by 60% and also reduced EMI’s costs by 67%.
All of this is the buildup to this week’s news. Those who want to cash out their investment are from the aforementioned group in that “70%” (everyone excluding Sony/ATV). This leaves potential buyers to speculation, but the most obvious potential buyer is Sony given their majority stake in EMI. It is also conceivable that another major competitor like BMG, Universal, Warner, or maybe another conglomerate of private equity firms, will also see this as a good opportunity.
So, is this the right timing? Is EMI overvalued? Some economists and Wall Street CFO’s say that current U.S. stocks are overvalued and that markets are beginning to show early signs akin to the 2008 collapse.
Whatever happens, and however this story develops, all potential buyers of music assets would be wise to learn from EMI’s checkered past and the lessons of Terra-Firma’s disastrous EMI investment.
And now for this week’s other headlines:
