By Yinka Adegoke - Analysis
NEW YORK (Reuters) - Skeptics might believe the music industry’s best days are behind it, but some institutional investors are snapping up catalogs of published songs that provide steady, recurring cash flows.
Pension funds and private equity firms have recently invested in some high-profile music assets, sparking concern by some industry executives that these nonstrategic investors could push up the prices of the best song catalogs.
Dutch fund ABP, the world’s third-largest state pension fund, this week bought the legendary Rodgers & Hammerstein catalog of songs from musicals including “The Sound of Music” and “The King and I.” Industry executives estimate the deal to be worth around $200 million.
ABP’s move came less than two weeks after private equity firm Pegasus Capital paid an estimated $55 million for Spirit Music Group, a song publisher with rights to some of the works of artists ranging from Frank Sinatra to Madonna.
“These funds have got a lot more cash than any music company and that will keep the prices of these catalogs above market rates,” said an executive who requested anonymity because his company had kicked the tires at Rodgers & Hammerstein.
Music publishers make money by exploiting the rights of their song catalogs. They get paid every time a song is played on the radio, in TV shows, in movies, at the theater, in video games and in advertisements to name a few outlets.
Song catalogs do not necessarily promise huge returns on investment, but rather regular cash flow from a business with relatively low capital expenditure compared with the more volatile venture capital-like model of record labels, which hope for hit songs to make most of their profits.
For example, at Warner Music Group’s WMG.N publishing unit Warner/Chappell, revenue grew steadily at a rate of 7.6 percent between 2006 and 2008. During that same period, Warner Music’s recorded music revenue rose, then fell, then rose again with the average being a decline of 1.9 percent a year.
“Publishers have a huge diversity of revenues,” said Roger Faxon, chief executive of EMI Publishing. “At EMI, even as CDs sales shrink we continue to see our revenues grow every year.”
ABP is unfazed by the troubles that have faced other music investors such as private equity firm Terra Firma TERA.UL which this year had to write down half the value of its 2.6 billion euro ($3.42 billion) acquisition of EMI Group in 2007. Warner Music was taken public by Chief Executive Edgar Bronfman Jr in 2005 with backing from private equity firms, and its shares trade at less than $5 today, a far cry from its $17 float price. The private equity investors, however, made their money back through a dividend payment.
With U.S. CD sales down by nearly a third last year, the recorded music industry continues to struggle with piracy and the move by consumers to digital songs.
That has not deterred ABP from the financial potential of song publishing. The pension fund set up a 5 billion euro ($6.57 billion) innovative asset unit last year to take direct holdings in new types of alternative investments.
In partnership with CP Masters run by Andre de Raaff, ABP has bought song catalogs from Vivendi’s (VIV.PA) Universal Music Group and the classical music catalog of Boosey & Hawkes in just over a year. It now has more than 200,000 pieces of music with annual revenue of over 100 million euros.
“Intellectual property like music publishing rights offers stable cash flows protected against inflation,” said Rein Kronenberg, senior counsel at ABP’s asset management unit.
“This diversifies our risk,” said Kronenberg, whose fund had 217 billion euros at the start of 2008. “Publishing has a smaller correlation with traditional asset classes like listed securities.”
But managing the rights to millions of songs and thousands of songwriters is not as easy as it looks, said Marty Bandier, chief executive of Sony/ATV, a publisher jointly owned by Sony Corp (6758.T) and pop star Michael Jackson.
“What any financial investor does with publishing assets is crucial because you need to market and promote those songs on a 24-7 basis,” Bandier told Reuters. “We’re still buyers in this market and when these investors decide they want to sell we’ll be here to pick those songs up.”
Song catalogs are sometimes valued at a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA), usually between eight and 12 times, said executives. On that basis, Warner/Chappell would be worth more than $1 billion, whereas its parent Warner Music’s market capitalization is currently only about $726 million.
However, most catalogs are valued on a net publisher share (NPS) basis, which is the gross publishing revenue collected after paying royalties to songwriters. Executives said catalogs like the Rodgers & Hammerstein’s are valued between seven to 14 times NPS.
Editing by Tiffany Wu and Steve Orlofsky