Forget the adage “going for a song”. Sony has paid $2.3bn to beef up its music catalogue by buying more of EMI. That values the music publisher at more than twice the sum paid in 2012. Anyone eyeing its 2.3m copyrights might linger over Queen’s song “Was it all worth it?” The answer is a grudging yes. The deal is no bargain, but it is sensible all the same.
The purchase— which triples Sony’s stake in EMI to 90 per cent — puts an enterprise value of $4.75bn on the business. That is about 15 times the estimated net publisher’s share, a measure of profitability used in the music industry that takes account of songwriters’ royalties. Though in line with recent deals, it marks a big step up from the 12 times multiple that was common a few years ago.
The re-rating of music publishing reflects the impact of music streaming. At first, the advent of the internet hit the music industry hard, with digital piracy leading to falling CD sales around the turn of the century. But the popularity of subscription-based streaming services has helped rescue the industry. The value of music copyrights has increased.
This has produced an impressive return for participants such as Abu Dhabi fund Mubadala in the Sony-led consortium that paid $2.2bn for EMI in 2012. They bought the business from Citigroup, in the wake of private equity group Terra Firma’s ill-starred 2007 acquisition of the business.
For Sony, the soaring value of the business is a mixed blessing. But criticisms that it could have bought the entire business for much less in 2012 are unfair. The Japanese group, then lossmaking, would not have been able to take on the debt for such a large deal. This time round, Sony has a very comfortable ratio of net debt to ebitda (a cash earnings measure) of 0.1. Its strong cash generation means it should have no problem servicing liabilities taken on with the acquisition.
The returns from music publishing are steady, if unexciting. That puts them bang in line with the strategy pursued by Sony’s Kenichiro Yoshida, the former finance chief who took over as chief executive in April. He wants to improve the quality of Sony’s earnings. Sustainable profits from recurring sales are just the ticket. The goal is to generate $18bn in cash flow over the next three years by buying more entertainment content and technology. The message from archive hit “Don’t stop me now” is apt. EMI is just the start.
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