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Warner Deal Is Reached

Edgar Bronfman Jr. would get another chance to run a record company if regulators OK $2.6-billion pact.

November 25, 2003|Jeff Leeds | Times Staff Writer

It looks as if Edgar Bronfman Jr. will get another chance to take a record company for a spin.

His investment team announced Monday that it reached a deal to purchase Warner Music for $2.6 billion, closing out Time Warner Inc.'s 36-year run in the industry and putting Bronfman, who in the 1990s built industry leader Universal Music Group, back in the business.

The pact would transform Warner Music -- now the third-biggest music firm, with a talent roster including the Red Hot Chili Peppers, Sean Paul, Madonna, R.E.M. and Linkin Park -- into the largest privately owned music company.

Bronfman, the former Seagram Co. chief executive and a vice chairman of Vivendi Universal, described his vision for an independent, private firm that would thrive when shielded from corporate pressures.

"I think there's an opportunity to run the business differently than it has been," he said in an interview. "We have great faith in its potential for growth."

Some analysts said the price was high, given the music industry's troubles as it faces sharply declining CD sales.

"The bid was very rich," Angela Kohler, global media analyst at Federated Investors, told Bloomberg News. Federated owns about 4 million shares of Time Warner. It "was much more money than I would have expected Time Warner to get for the business."

Time Warner chose Bronfman's offer over a rival bid by British music giant EMI Group, which would have paid about $1 billion in cash and given Time Warner as much as a 25% stake in the company.

Under the terms of the Bronfman deal, Time Warner could purchase as much as 15% of the music operation from the Bronfman team over the next three years.

Bronfman would probably be the biggest individual investor. TV mogul Haim Saban, who kept changing his mind about investing in the company, pulled out at the last minute. Initially, Bronfman planned to put in $50 million to $100 million but recently raised his stake to about $250 million, sources said.

People close to the deal say Saban could rejoin the team, though with a smaller investment than the $200 million he once planned. Saban declined to comment.

Leveraged-buyout firm Thomas H. Lee is putting in an estimated $600 million, Bain Capital is expected to put in $350 million, and Providence Equity is chipping in about $150 million.

If antitrust regulators approve the acquisition, as they are expected to do, Bronfman will face the challenge of revitalizing the music giant as global CD sales continue to sink. Forecasters say they will fall 9% this year.

To survive the slowdown, Bronfman would slash at least $100 million in costs at the music company -- and potentially more than double that -- sources close to him say. Warner Music includes the Warner Bros., Atlantic and Elektra record labels and music publisher Warner-Chappell and employs about 5,000, including about 1,060 in Los Angeles.

Insiders say Bronfman also may consider withdrawing Warner Music from operations in its 15 worst-performing countries.

One executive close to Bronfman estimated that he could save $50 million from restructuring Warner-Chappell, which licenses tunes to films and commercials and has lower profit margins than some of its rivals.

"Chances are, they didn't buy the company to leave it like it is," one Warner Music label executive said.

Other music executives speculated that Bronfman would eventually pursue a merger with EMI to bolster his company's clout and seek additional cost savings by paring away duplicative jobs. Bronfman dismissed that idea.

Two other recording labels are hoping to merge: Sony Corp. and Bertelsmann are pursuing a deal that would unite their recorded-music operations and create a company with about 25% of global sales, rivaling the industry leader, Vivendi's Universal Music.

On Monday, Bronfman and representatives from Lee met with top label executives to outline their plans. Bronfman urged them to manage their businesses for cash to help him keep up his debt repayment schedule, sources said.

But he didn't lay out how he expected to cut costs or bolster profit, sources said.

EMI had said that if it had taken over Warner Music, it would have saved as much as $300 million in costs by integrating operations. The Bronfman team wouldn't be able to cut costs that way.

And the Warner Music operation already has been restructured by Chairman Roger Ames, the former talent whiz who was hired to run it in 1999.

In the last three years, Warner Music has shed about 2,000 jobs. It shifted an additional 5,500 off the payroll this year when it sold its CD- and DVD-manufacturing unit.

"It's going to get bloody," predicted one rival music executive. Ames "has already been a pretty good cost cutter."

The Bronfman plan is for Ames to remain at the company as the No. 2 executive, behind Bronfman himself. For his part, Ames said Monday, "We're going to miss Time Warner. But we're really happy now that this is done, and we can get back to concentrating on the business."

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