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Warner is likely not looking to make a play for EMI over the next few days, it is understood. It is also understood the company believes it will still acquire the recorded music arm at a later date if it chooses not to bid for the whole of EMI now.
It is further understood that Warner was only granted access to EMI’s data-room over the last couple of days and is therefore in no great hurry to launch a competing offer.
It was suggested that Terra Firma has been in the data room for at least 10 days and that the decision to announce the deal on 21 May could now be seen in the context of yet another disappointing set of EMI results, also published on 21 May. A deal source added that beating Terra Firma’s 265p offer would now likely be dilutive for the Warner US group, as Warner trades on a lower multiple and could not be as aggressive on leverage.
Warner is understood to have been in contact with several private equity firms, including Terra Firma, about the prospect of acquiring the recorded music arm once the sale of EMI wholesale has been completed.
It was also suggested that Warner’s hands are tied at the moment from launching a rival bid because of the substantial regulatory risk or at least perceived risk associated with any bid for EMI. Resolution of the anti-trust issue has been held up while the EC collects data on the marketplace for its investigation into the Sony BMG merger. Complete clarity on the issue could take up to nine months, according one source. Deal sources and an insider said Warner would likely have to offer considerably more than the 265p because EMI’s shareholders could have cash in their pockets within a couple of months with Terra Firma and without the headache of waiting on Warner and hoping the deal gets regulatory clearance.
An insider and two deal sources, however, have suggested the prospect of Cerberus, Fortress and One Equity improving on the 265p offer on the table is unlikely. Terra Firma’s offer is priced at 18x 2007 EBITDA, or 13.5x forecast 2008 EBITDA and 11.5x forecast 2009 EBITDA. Bidders could therefore wait two years before the multiple starts to look reasonable at a time when the business itself was declining, a deal source explained. EMI said when it announced the deal that the Terra Firma offer was the most attractive bid received.
Aside from waiting for a private equity sale to complete and then acquiring recorded music 6-12 months down the line when and if the regulatory concerns have subsided, Warner could also launch a joint bid with Cerberus, Fortress or One Equity now based on the break-up of the music publishing and the recorded music businesses, it was suggested.
The BMG/Universal deal would provide a good benchmark to value the music publishing business, one source said. Universal agreed in September 2006 to pay 19.3x 2005 EBITDA for BMG Music Publishing, the US-based music publisher and distributor of Germany’s from Bertelsmann AG.
EMI’s recorded music division, however, has had a tougher time and needs more restructuring, the source said. Any bidder would need to judge how far costs could be cut without cutting the performance of the business, adding significant execution risk, he said.
One source said, however, it would be very hard on a practical level for a sponsor to raise funds dependent on selling part of the business at a later date because of the competition risk. “How could they raise funds if that is the key part of the strategy? To get backing for such a high risk strategy would be very difficult,” he said.
There is no pre-agreement currently with Terra Firma, but it is understood the two sides have talked. A source close to Terra Firma said the plan at the moment was to acquire EMI wholesale, but the source could not rule out the spin-off of recorded music at a later date.
Warner can draw synergies from recorded music where private equity cannot and considers itself to be the only feasible bidder for that struggling business for this reason. Also, Warner would offer less execution risk than private equity in buying this part of the business, something the EMI board would take notice of, a deal source said.
Terra Firma and Warner declined to comment.
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