Who desires to play a recreation of “Sorry, I Don’t Converse Finance”?
I’ll begin!
Earlier as we speak (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 offered to Kobalt in 2017).
On account of the brand new deal, Chord Music’s property (when their present distribution/administration offers expire) will grow to be distributed by way of UMG’s Virgin Music Group and administered by way of Common Music Publishing Group (UMPG).
Nevertheless, 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 larger.
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 “offers us with an environment friendly car for future catalog acquisitions, with out important capital allocation by a mix of leverage and accomplice fairness capital”.
Did you simply press your “Sorry, I Don’t Converse Finance!” button?
If you happen to did, congratulations! Right here’s your prize: a translation of Muir’s quote that even a five-year-old might comprehend… “Common Music Group is now in a position to purchase extra stuff with out spending an excessive amount of of its personal cash.”
You see, UMG solely has one accomplice in Chord Music – and it’s a accomplice who isn’t afraid of recognizing the worth of hit music by spending giant sums on it.
“Common Music Group is now in a position to 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 current property, Common says that its new “long-term partnership” with Dundee will see the 2 firms “purchase further 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 “accomplice fairness capital”).
Listed here are three extra key observations on as we speak’s game-changing deal, and what it’d imply for the broader business…
1) Dundee Companions simply turned 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.
Thus far, Dundee’s exercise within the music enterprise has been impactful, fairly 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.
Right this moment’s Chord announcement explodes the size 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 value… considerably greater than a billion {dollars}.
Are you able to consider every other personal households which are ‘all in’ on music rights to that form of scale as we speak?
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 amass music catalogs.
It is a extremely important improvement.
To begin with, UMG has a strict inside coverage RE: the catalog acquisitions it’s prepared to make autonomously. On a March 2023 earnings name, Sir Lucian Grainge stated in no unsure phrases: “UMG… isn’t within the passive rights enterprise.”
Grainge was borderline dismissive of firms who purchased revenue streams/fractional rights after which suffered from the “incapability to amass all of the rights essential to actively handle something”.
“We see virtually every part,” stated Grainge of UMG’s view of property on the market within the market. “We go on most of it.”
His level: Common Music Group, as a rule, solely buys rights that give it full management over the business 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: on the subject of long-term UMG artists seeking to promote their future recorded music royalties.)
The Chord cope with Dundee Companions allows UMG to take part on this world of shopping for fractional rights for the primary time – one thing which may assist the corporate compete extra aggressively for catalog choices that don’t meet its core UMG acquisition standards.
One other necessary level: UMG’s whole spending on catalog acquisitions in recent times has shrunk.
In 2022, UMG spent EUR €359 million on catalog music acquisitions, in line with its monetary data. 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 beneath).
Enjoying into this annual discount in Common’s catalog acquisition spending: The pure rigidity between UMG delivering money to traders… and spending money on catalogs.
As MBW has beforehand defined, since floating on the inventory trade in Amsterdam in September 2021, UMG has promised its traders a fee of no less than 50% of its web revenue annually in dividends.
In 2022 (the final full 12 months we now have on document), UMG paid out a whopping EUR €926 billion in dividends to shareholders.
Spending giant sums of money on catalog acquisitions would negatively have an effect on Common’s Free Money Movement (FCF), a supply for the annual dividends the corporate pays its shareholders.
This concept will get particularly attention-grabbing if Common was ever preventing to amass an enormous, iconic music catalog – like Queen’s music rights, for instance, that are nonetheless regarded as available on the market 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, lowering its FCF, or rack up a load of debt (full with long-term curiosity funds).
UMG’s funding in Chord Music offers it a 3rd possibility: 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 stated catalog’s long-term distributor/administrator… and never having to observe that distribution/administrative market share go elsewhere within the business.
(This logic might additionally apply when an artist or songwriter’s long-term licensing settlement with UMG is expiring, and the proprietor is seeking to promote their catalog. UMG can now preserve 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 stated 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 in recent times.)
In 2022, Warner pulled an analogous transfer once more, this time partnering with BlackRock-backed Affect Media Companions, which struck a nine-figure cope with 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 amass Bruce Springsteen’s publishing songbook.
Extra not too long ago, Kobalt Music Group (so far the publishing administrative publishing accomplice 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 saying 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 homeowners”.
Simply twenty-seven months later, KKR has now offered up. “Lengthy-term homeowners” 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 set of music rights.
Having acquired 51% of BMG in 2009, KKR then offered 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 scale of UMG’s EBITDA in 2022 (€2.03bn);
- This 24-times a number of infers that BMG’s truthful valuation as we speak, based mostly on its 2022 EBITDA, can be someplace within the area of USD $4.9 billion.
- Reminder: KKR offered 51% of BMG for round $1 billion eight years in the past.
- Additionally attention-grabbing: Prior 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 response to as we speak’s press launch on Chord Music, KKR now seems to have moved its property from these offers into Chord… and offered 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 every 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 worth) primarily brought on by rates of interest bouncing upwards.
But apparently 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 offered 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.
The entire purchasers in these offers – similar to Dundee Companions and Chord Music – imagine that the boundless income development story for premium music rights has many extra chapters to go.
If you happen to 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 positive you possibly can guess the reply.Music Enterprise Worldwide