When Thomas H. Lee Partners, Bain Capital and Providence Equity Partners backed Edgar Bronfman Jr. in the acquisition of Warner Music Group (WMG), the group felt they were getting a steal. With music entertainment assets depressed at the time, thanks to piracy concerns, the buying group went against the tide and was able to snap up the company for around $2.6 billion. Now, less than two years later, the group is about to grab a partial realization of the investment through a proposed $750 million IPO.
Everything was going either as planned or better, until a wrench was thrown into the works earlier this month when Linkin Park, one of Warner Music Group’s bigger acts, issued a press release saying it wanted “off WMG.” The band, through the statement, cited the potential profits that will be made by the group’s investors as the motivation for its holdout.
The press release read, in part: “The new owners of the Warner Music Group will be reaping a windfall of $1.4 billion from their $2.6 billion purchase a mere 18 months ago if their planned IPO moves forward. Linkin Park, their biggest act, will get nothing.”
The investment has up to this point been an unmitigated success for the investors, which sunk $1.25 billion of equity into the transaction. The group has already received back more than $1 billion – $681 million through a dividend recap and $350 million through other payouts.
The investors are also expected to sell shares alongside the public offering and in conjunction with the offering, the IPO prospectus states that Warner Music will declare another $141.5 million cash dividend that will be awarded to the investors and members of management. On top of that WMG will also pay a $73 million termination fee related to the cessation of the group’s management agreement.
Usually, this would be grounds for congratulations and handshakes. Linkin Park, however, based on the timing of the press release, is ostensibly looking to undo the investors’ work and the band feels its departure from the label will help to that end. In its release, the band said the loss of “future Linkin Park recording will be disastrous for WMG,” and the band credited itself with contributing “approximately 10% of the entire Warner Music Group’s sales.” The release also took issue with the cost cutting at Warner Music.
However, the statement failed to mention that under the new ownership WMG has been able to reverse what were huge losses for the company. In the fiscal first quarter, for example, Warner Music generated $36 million in net income for the three months ended December 31, which marks a significant improvement over a the $1.15 billion loss registered in the same period last year.
This is not the first time the artists have taken aim at WMG during the investor group’s ownership. Madonna’s Maverick Records filed a $200 million lawsuit against the company shortly after the investors recouped some of their capital through the aforementioned dividend recap. According to reports, the two sides agreed to a settlement between $10 million and $20 million, and Madonna still works under WMG.
Davis Shapiro & Lewit, LLP are said to be representing Linkin Park in its grievance. Also, an interesting wrinkle to this spat is that the Linkin Park press release was issued by the talent agency The Firm. This is notable considering the Firm’s CEO Jeff Kwatinetz not only advised the Warner Music Group investors on the purchase, but also orchestrated a significant investment from Thomas H. Lee Partners and Bain Capital into his company.
In the IPO, which is expected to float later this month, Warner Music Group indicated it will offer 32.6 million shares priced at between $22 and $24 per share. It plans to trade on the NYSE under ticker symbol “WMG.” Goldman, Sachs & Co., Morgan Stanley, Deutsche Bank Securities, Lehman Brothers, Citigroup and Banc of America Securities are all listed as underwriters for the offering.
Warner Music did not return correspondence from Buyouts, but in a statement given to Rolling Stone, the company called Linkin Park’s charges baseless and referred to the “inflammatory threats” a negotiating tactic.
Meanwhile, a source close to the company told Buyouts, “There is always going to be some lawyer that represents these groups that is going to look for a pressure point [in negotiations]… We like Linkin Park and the company has a good relationship with the band, but their numbers are way off.” The source added that WMG’s new recorded music division has the lowest margins in the company, and that after the costs that go into producing and marketing new acts are factored in, the division is not a significant contributor to the company’s overall profitability.
Representatives at Thomas H. Lee, Bain Capital and The Firm declined to comment.