PE Group Dances To Warner Music For $2.6B –

The deep pockets of some of the country’s most well-known private equity groups were enough to outbid strategic suitor EMI Group for the purchase of Time Warner Inc.’s music label, Warner Music Group. The winning bid came in at $2.6 billion-$1 billion more than EMI’s offer.

The LBO consortium consists of Thomas H. Lee Partners, Bain Capital, Lexa Partners (headed up by Edgar Bronfman Jr.) and Providence Equity Partners. The deal is expected to close during the first quarter of 2004. EMI backed out of the attempted takeover less than a week after announcing its interim profit results, which stated EMI’s profit dropped in the first half of its fiscal year.

The deal is not yet finalized, but a source close to the deal said the debt-to-equity split is roughly 50-50, with TH Lee leading the equity piece with approximately $600 million. Bain will put up approximately $350 million, Lexa plans to contribute $250 million and Providence coffers will contribute roughly $150 million, the source said.

Bank of America, Deutsche Bank, Lehman Brothers and Merrill Lynch are providing approximately $1.25 billion in debt, although terms of the deal have yet to be finalized.

Time Warner hasn’t shut the door completely on its music label. Under the terms of the agreement with the buyout group, the media behemoth has various options to buy back a chunk of the music business. One caveat allows Time Warner-after a three-year waiting period- to buy up to 15% of Warner Music at a 25% discount of fair market value. Another option allows Time Warner to buy back 20% of the record label if the investor group merges with another strategic in the future.

The music industry has been hit hard recently, as record sales have slipped for three consecutive years, due in part to the massive amounts of records pirated over the Internet. The sale of Warner Music (the group’s name will remain unchanged after the sale) is expected to reduce Time Warner’s reported net debt by roughly $2.6 billion.

“We believe the [music] industry will be down for the next 18 to 24 months and then experience a slow recovery,” said Scott M. Sperling, a managing director with TH Lee. “Warner Music’s brands and music publication business have stable and strong cash flows, and overall the company has a strong free cash flow. Through changes, we can grow that aggressively even if the overall industry does not show growth.”

Regarding piracy, Sperling said, “Over the past four to six months, the efforts of the industry, both technological and legal, have had a significant impact on piracy. Just as important, we’re beginning to see the emergence of rapid growth in the digital music platforms that meets growing customer needs, such as ease of use, broadened selection and attractive pricing.”

Music To His Ears

Bronfman, CEO of Lexa Partners and the most senior executive in the soon-to-be independent Warner Music, may be looking to capture lightening in a bottle again with the Warner Music purchase. His first big hit in the music business was buying Universal Records and turning it into the world’s biggest record company. Universal was part of Seagram Co., the Canadian liquor business long owned by his family, and Vivendi purchased Universal in 2000. Bronfman attempted to re-enter the music business earlier this year in a bid to buy back Seagram, but lost out to NBC.

Warner Music, with a stable of more than 800 artists, boasts some of the most well-known artists in music today, including Madonna, Tom Petty and R.E.M. It also owns some of the more recognizable record companies, including The Atlantic Group, Elektra Entertainment and Warner Bros. Records. Warner Music also owns an extensive music catalog, including Ray Charles, The Grateful Dead and Frank Sinatra.