Analysis: Warner Music’s new owner, joined by music industry veterans Edgar Bronfman and Lyor Cohen, may look to consolidate the business even more
It was just a few months ago that Len Blavatnik and Lyor Cohen — the global billionaire industrialist and the hip-hop-to-A-list record-label executive — commanded the most noticeable seat in a media fishbowl several months ago. Huddled at Table 1 in the oval-shaped window of Michael’s, media's power-lunch spot.
Did they spend time time chewing the fat over the music industry’s crummy state? That seems likely.
With Blavatnik’s purchase of Cohen's Warner Music Group on Friday, the duo – along with company chairman Edgar Bronfman Jr., just raised their visibility in a business where the disruption of the digital media age is most vividly on display.
EMI currently is on the sales block, with owner Citigroup hoping to recover billions of dollars of a bad loan it made to the previous owner, Guy Hand’s private equity firm, Terra Firma. A back-to-back deal by Blavatnik would appear to be fated, especially with EMI and Warner each more vulnerable as the industry's smaller giants. It would result in massive cost savings and bolstered profits.
From four music giants the industry would consolidate to three, leaving Warner-EMI to battle No. 1 Universal Music Group and No. 2 Sony-BMG.
One of the more intriguing triumvirates ever to come together on the business scene will try to prevail in an industry under siege. They see themselves positioned to capitalize on any promise on the industry's horizon.
“The music industry is at an inflection point where digital adoption is rapidly gaining momentum,” Jorg Mohaupt, head of media at Blavatnik’s Access Industries, said in the statement. “Warner Music, as one of the most progressive forces in the music business, is well positioned to capture this opportunity for music creation and distribution.”
When or if they pull off an EMI deal, which will likely be their first order of business, it will fulfill what seems to fated. Warner Music and EMI have flirted with marriage for a decade or longer, before and after Time Warner sold the music company to an investor group assembled by Bronfman. Regulat ory and financial barriers thwarted each effort.
And now each is more desperate for a union that will be an economic salvation for both in an industry with sales melting away for more than a decade. As sales of 99-cent digital downloads have soared, the demand for CDs that yield labels $10 wholesale have steadily plunged. All the while, acts and staffs have been on the label chopping block, while iTunes-iPod parent, Apple, emerged as music’s most powerful company.
Various estimates put a cost-savings from a potential Warner-EMI merger at no less than $300 million.
Ironically, Bronfman may have pulled off the last easy money from the recorded music business through his purchase of the Warner Music in 2003.
A long-aspiring showbusiness mogul from the onetime Seagram spirits empire, Bronfman and his private equity backers had earned 130 percent on the group's original $2.6 million purchase before today’s $3.3 billion purchase by Blavatnik, according to an internal calculation about which the company won’t comment.
According to published reports, an unnamed member of the investment group copped to having doubled his money, in part through dividends that were partly financed by borrowings. The investment returns should help to burnish Bronfman’s reputation, which has suffered through the years from earlier forays into Hollywood and media conglomeration.
Still, with some $2 billion of debt on its book, Warner Music faces challenges along with the rest of the industry. But he, Cohen and, foremost, Blavatnik — who purchased the company through his Access Industries — are betting another music windfall is in their future.
Still, Blavatnik should be aware that Warner Music is hardly a glamorous trophy purchase. He was part of Bronfman’s original investment group and served as a director for year. A global entrepreneur, he owns industrial assets stretching from the North and South America to Europe, particularly in Russia, where he began his business empire in energy. Last month, Forbes estimated his wealth at more than $10 billion.
By snaring Warner Music, he is bouncing back from a failed bid for another media asset, Metro-Goldwyn-Mayer Inc., last year. He also owns the British distribution arm of Mel Gibson’s Icon Group, which has rights to such films as “Driving Miss Daisy” and “Dances With Wolves.”
Another of his investments was in the luxury lifestyle fashion brand, Tory Burch, who happens now to be Lyor Cohen’s girlfriend.
Cohen’s career dates back to the 1980s as a artists manager at Rush Management, hip-hop icon Russell Simmons management company. He subsequently helped manage Def Jam, the iconic rap label founded Simmons and producer Rick Rubin, into an industry force that Bronfman once owned as part of Universal Music Group, the world’s largest music company.
At Warner, where he was recruited by Bronfman, Cohen is credited with embracing 360-deals. A new model in the music industry, such deals give the label a stake not just in an artist’s record sales, but such ancillary businesses as touring, merchandise and licensing.
According to people close to the company, 360-deals will be a major part of the growth strategy at a combined Warner-EMI.
No doubt, it will be a lunchtime topic at Michael’s.