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Warner Music Group said to weigh a potential sale

As CEO Edgar Bronfman Jr. is convicted in a French court of insider trading, the company looks at a bid from Kohlberg Kravis Roberts.

January 22, 2011|By Alex Pham, Los Angeles Times

Warner Music Group Corp. has set the ball in motion for a potential sale of the company, even as it weighs a bid to buy rival EMI Music.

Warner Music has retained Goldman Sachs to vet a bid from private equity firm Kohlberg Kravis Roberts and potentially others, according to sources at one of the companies. KKR had approached Warner late last year about a potential deal.

Shares in Warner Music shot up $1.29, or 27.3%, to $6.01 as speculation of a sale overshadowed news that the New York company's chairman and chief executive, Edgar Bronfman Jr., was convicted Friday in French court of insider trading while he was vice chairman of Vivendi in 2002. The court slapped Bronfman with a fine of 5 million euros, or roughly $6.7 million, and a suspended 15-month prison sentence.

Warner Music, which has 21% of the market share in the U.S., may have difficulty extracting a sale price premium at a time when the music business has been ravaged by piracy and has seen growth in sales of digital music taper off, analysts said.

Overall U.S. music sales shrank 2.4% in 2010, while sales of digital tracks grew just 1% after years of torrid growth, according to a recent report by Nielsen SoundScan.

"The music industry appears set for a very challenging 2011, as digital sales turn negative during the year domestically with physical sales continuing to fall rapidly," said Richard Greenfield, an analyst with BTIG, a New York brokerage firm. "We would be very surprised to see anyone taking Warner's 'bait.'"

Warner Music's decision, first reported Thursday in the New York Times, does not indicate that a sale is imminent, the sources said. Instead, the move appears to throw the industry into a maelstrom of chatter about potential musical mash-ups.

One possible outcome, according to BTIG, is that Warner Music could shed parts of its business, specifically its profitable music publishing arm, to raise money to make a run at EMI.

The current owner of EMI, Terra Firma, has been struggling to meet loan payments to Citigroup, which lent the British private equity group $4.2 billion to purchase the record company in 2007. Should Terra Firma default, Citigroup could initiate an auction to sell EMI and recover its loan.

EMI last year reported a $2.4-billion loss for fiscal 2009 because of write-downs related to the acquisition, even though its core music business generated $458 million in operating profit. The company, the smallest of the four major music labels, had about 10% of the U.S. music market, according to market research group Nielsen SoundScan.

Warner Music, the third-largest label in the U.S. after Universal Music Group and Sony Music Entertainment, posted a net loss of $143 million on sales of $2.98 billion its fiscal year ended Sept. 30. A year earlier, it lost $100 million on $3.2 billion in revenue.

Close to 60% of the company's shares as of Sept. 30 were owned by three private equity firms — Thomas Lee Partners, Bain Capital Investors and Providence Equity Partners Inc. Bronfman owned close to 7% of the company as of Jan. 6.

Bronfman, 54, said he would appeal the French court's ruling, a move that would ensure that the case, which started in 2002, would drag on for several more years.

The court also convicted former Vivendi Chief Executive Jean-Marie Messier with improperly using company funds when he arranged a 20-million-euro severance package. Messier, who was fined 150,000 euros and given a suspended three-year sentence, did not return messages seeking comment.

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