Who needs to play a recreation of “Sorry, I Don’t Converse Finance”?
I’ll begin!
Earlier in the present day (February 20), Common Music Group introduced the $240 million acquisition of a 25.8% stake in Chord Music – a portfolio of round 60,000 songs (or, extra precisely, cuts in songs), most of which had been as soon as owned by a sister-fund of Kobalt’s.
Chord owns stakes in a flurry of pop hits from the likes of Ryan Tedder and John Legend, in addition to smash songs from The Weeknd, Lorde, and Diplo that had been initially developed by Matt Pincus, Ron Perry, and Carianne Marshall at SONGS Music Publishing (earlier than that catalog was bought to Kobalt in 2017).
Because of the brand new deal, Chord Music’s property (when their present distribution/administration offers expire) will turn out to be distributed by way of UMG’s Virgin Music Group and administered by way of Common Music Publishing Group (UMPG).
Nonetheless, this – UMG’s new quarter-ownership of a bundle of candy music property – is simply half considered one of this story.
Half two is arguably a lot greater.
And it’s at this level we get to play “Sorry, I Don’t Converse Finance”.
In a press launch issued this afternoon, Boyd Muir, CFO and EVP of Common Music Group, was quoted as saying that UMG’s funding in Chord “gives us with an environment friendly car for future catalog acquisitions, with out vital capital allocation via a mix of leverage and associate fairness capital”.
Did you simply press your “Sorry, I Don’t Converse Finance!” button?
In case you did, congratulations! Right here’s your prize: a translation of Muir’s quote that even a five-year-old may comprehend… “Common Music Group is now capable of purchase extra stuff with out spending an excessive amount of of its personal cash.”
You see, UMG solely has one associate in Chord Music – and it’s a associate who isn’t afraid of recognizing the worth of hit music by spending massive sums on it.
“Common Music Group is now capable of purchase extra stuff with out spending an excessive amount of of its personal cash.”
Dundee Companions, aka the funding workplace of the Hendel household, now owns the different 75%-ish of Chord Music… having teamed with UMG to purchase out Dundee’s earlier majority-partner within the fund, KKR.
Along with absorbing the market share from Chord’s present property, Common says that its new “long-term partnership” with Dundee will see the 2 firms “purchase extra catalogs by way of Chord sooner or later”.
Judging by Chord’s new setup, UMG will make its presence felt on the negotiating desk for these acquisitions (i.e. utilizing its “leverage”)… however will solely be anticipated to fund a minority piece of every deal (with the remainder being funded by “associate fairness capital”).
Listed below are three extra key observations on in the present day’s game-changing deal, and what it would imply for the broader trade…
1) Dundee Companions simply grew to become an actual participant within the music enterprise
What ties collectively Chord Music, Kobalt Music Group, Partisan Data, music rights funding platform JKBX, AI music platform Boomy, the Broadway hit musical, Fela!, and Knitting Manufacturing facility Leisure?
All of them have obtained funding from the Hendel household, aka Dundee Companions.
Two generations of traders are behind Dundee: Father Stephen Hendel – the person whose cash and willpower pulled Fela! to broadway – and son Sam Hendel (pictured inset), who has led Dundee’s investments into the likes of Chord and JKBX.
To this point, Dundee’s exercise within the music enterprise has been impactful, relatively than blockbuster.
For instance, Dundee has owned a minority stake in Kobalt Music Group following the latter firm’s majority sale to Francisco Companions in 2022.
In the present day’s Chord announcement explodes the dimensions of Dundee’s funding in music.
The brand new deal, says UMG, values Chord Music at $1.85 billion (together with debt). This implies Dundee’s 75%-ish stake in Chord is price… considerably greater than a billion {dollars}.
Are you able to consider another personal households which might be ‘all in’ on music rights to that form of scale in the present day?
2) Common simply ‘did a Tempo’. Will it get higher outcomes?
The Chord Music deal is the primary time that Common Music Group has partnered so publicly with outdoors finance to accumulate music catalogs.
This can be a extremely vital improvement.
Initially, UMG has a strict inner coverage RE: the catalog acquisitions it’s prepared to make autonomously. On a March 2023 earnings name, Sir Lucian Grainge mentioned in no unsure phrases: “UMG… will not be within the passive rights enterprise.”
Grainge was borderline dismissive of firms who purchased earnings streams/fractional rights after which suffered from the “lack of ability to accumulate all of the rights essential to actively handle something”.
“We see nearly the whole lot,” mentioned Grainge of UMG’s view of property on the market within the market. “We move on most of it.”
His level: Common Music Group, as a rule, solely buys rights that give it full management over the industrial exploitation of the music concerned.
Drawback is, that form of stringency locks UMG out of buying profitable and helpful, however finally passive, property in music. (For instance: with regards to long-term UMG artists trying to promote their future recorded music royalties.)
The Chord take care of Dundee Companions allows UMG to take part on this world of shopping for fractional rights for the primary time – one thing that may assist the corporate compete extra aggressively for catalog choices that don’t meet its core UMG acquisition standards.
One other vital level: UMG’s complete spending on catalog acquisitions lately has shrunk.
In 2022, UMG spent EUR €359 million on catalog music acquisitions, based on its monetary information. That was round a 3rd of the quantity it spent on the class in 2020 (€929 million), a 12 months when it paid a nine-figure sum for Bob Dylan’s publishing rights (see under).
Enjoying into this annual discount in Common’s catalog acquisition spending: The pure stress between UMG delivering money to traders… and spending money on catalogs.
As MBW has beforehand defined, since floating on the inventory change in Amsterdam in September 2021, UMG has promised its traders a cost of at the least 50% of its internet earnings annually in dividends.
In 2022 (the final full 12 months now we have on file), UMG paid out a whopping EUR €926 billion in dividends to shareholders.
Spending massive sums of money on catalog acquisitions would negatively have an effect on Common’s Free Money Stream (FCF), a supply for the annual dividends the corporate pays its shareholders.
This concept will get particularly fascinating if Common was ever preventing to accumulate an enormous, iconic music catalog – like Queen’s music rights, for instance, that are nonetheless considered in the marketplace for a $1 billion-plus price-tag.
Proper now, to execute a deal that measurement, UMG would presumably have two selections: Spend a bunch of money, decreasing its FCF, or rack up a load of debt (full with long-term curiosity funds).
UMG’s funding in Chord Music provides it a 3rd choice: As long as Dundee Companions is prepared to majority-finance a catalog deal (even at a splashy a number of), UMG would solely be on the hook for a minority of the value.
UMG would then profit from the upside of being mentioned catalog’s long-term distributor/administrator… and never having to observe that distribution/administrative market share go elsewhere within the trade.
(This logic may additionally apply when an artist or songwriter’s long-term licensing settlement with UMG is expiring, and the proprietor is trying to promote their catalog. UMG can now hold the distribution/administration market share if Chord acquires the asset.)
Common Music Group isn’t the primary main music firm to see sense in partnering with outdoors finance for these causes.
In December 2019, Warner Music Group introduced a partnership with Tempo Music – a subsidiary of Windfall Fairness Companions – which mentioned it had a spending capability “north of a billion {dollars}”.
(Rumors of Tempo’s portfolio being on the block for a sale have circled the corporate lately.)
In 2022, Warner pulled an analogous transfer once more, this time partnering with BlackRock-backed Affect Media Companions, which struck a nine-figure take care of Enrique Iglesias on the finish of 2023.
In the meantime, again in late 2021, Sony Music Group partnered with Eldridge Industries, owned by Todd Boehly, to accumulate Bruce Springsteen’s publishing songbook.
Extra just lately, Kobalt Music Group (so far the publishing administrative publishing associate of Chord Music) introduced in November that it had partnered with Morgan Stanley.
Kobalt can now spend $700 million of MS’s cash on shopping for and administering copyrights.
3) KKR bows out of music rights… once more. Will it reside to remorse it… once more?
Right here’s a lesson within the language of Wall Road.
In October 2021, KKR issued a press launch asserting Chord Music. On the time, Chord was majority-owned by KKR, minority-owned by Dundee Companions, and had simply sealed a $1.1 billion acquisition of rights from a Kobalt fund.
The press launch acknowledged that the $1.1 billion deal “connects the works within the [Kobalt] Portfolio with long-term house owners”.
Simply twenty-seven months later, KKR has now bought up. “Lengthy-term house owners” certainly!
(In distinction, Dundee Companions, by doubling down on Chord, has arguably come good on the PR’s promise.)
Apparently, this isn’t the primary time KKR has jettisoned a group of music rights.
Having acquired 51% of BMG in 2009, KKR then bought its stake within the firm in 2016 for round USD $1 billion, giving Bertelsmann full possession of the music agency.
BMG’s annual working EBITDA in 2022 stood at USD $205 million.
Fast math:
- Common Music Group’s present market cap worth on the Euronext is EUR €49.15 billion;
- That’s roughly 24-times the dimensions of UMG’s EBITDA in 2022 (€2.03bn);
- This 24-times a number of infers that BMG’s honest valuation in the present day, primarily based on its 2022 EBITDA, can be someplace within the area of USD $4.9 billion.
- Reminder: KKR bought 51% of BMG for round $1 billion eight years in the past.
- Additionally fascinating: Up to now few years, KKR and BMG have operated a joint fund to purchase music property. Acquisitions have included John Legend’s songbook and the “music pursuits” of ZZ High. In line with in the present day’s press launch on Chord Music, KKR now seems to have moved its property from these offers into Chord… and bought them to Dundee/UMG.
So… will KKR remorse promoting its majority stake in Chord down the road, simply because it doubtless regrets its untimely exit from BMG?
That each one relies on how bullish you’re feeling in regards to the long-term worth story forward for premium music rights.
We’ve simply witnessed a interval of uncertainty on the blockbuster finish of music’s catalog acquisition market (see: the story of Hipgnosis Songs Fund‘s share value) primarily brought on by rates of interest bouncing upwards.
But curiously sufficient, after one thing of a chill wind within the big-money catalog acquisition recreation in H2 2022 and H1 2023, the previous few months have seen the market’s warmth rising:
- In November, Harmony paid near half a billion {dollars} to purchase the music portfolio of Spherical Hill‘s UK-listed fund;
- A month later, that nine-figure Enrique Iglesias catalog sale to Affect Media Companions was introduced;
- Simply final week, it was confirmed that Rod Stewart had bought his pursuits in his publishing catalog and recorded music, in addition to some identify and likeness rights, for round $100 million to Irving Azoff‘s Iconic Artists Group;
- Rumors proceed to bubble away on the market a couple of main potential new catalog deal between Blackstone/Hipgnosis and Shakira;
- And the Michael Jackson property reportedly reached an settlement with Sony in latest weeks to promote the corporate a 50% stake in MJ’s tune and recorded music portfolio for someplace upwards of $600 million.
All the purchasers in these offers – identical to Dundee Companions and Chord Music – imagine that the boundless income development story for premium music rights has many extra chapters to go.
In case you requested any of them in the event that they thought the likes of Spotify and YouTube Music ought to additional enhance their subscription costs in 2024?
I’m certain you would guess the reply.Music Enterprise Worldwide
