Warner Music Group , one of the four major record companies, has hired the investment bank Goldman Sachsto seek out potential buyers for the company, a process that will play out while Warner continues to explore buying the beleaguered British music giant EMI.
The decision to hire Goldman Sachs came after several suitors, including the buyout firm Kohlberg Kravis Roberts, approached Warner Music’s management in recent months about buying the company, according to an executive briefed on the matter who spoke only anonymously.
Instead of negotiating solely with K.K.R., the company’s management decided to begin a formal sale process by hiring Goldman, which has recently begun making pitches to financial investors and media companies about buying Warner.
One possible outcome of the auction is for Warner to sell not the entire company but only Warner/Chappell, its prized publishing arm, said a person with direct knowledge of the process.
Meanwhile, a separate set of bankers within Goldman has been working on a potential acquisition of EMI by Warner. Goldman has reached out to Citigroup , which owns a large amount of EMI’s debt and could soon control the company if it fails to meet its payments, according to executives involved in the process, who would speak of the confidential negotiations only anonymously.
The unusual two-track process of Warner seeking to buy while also exploring selling out to new investors underscores the desire of Warner’s private equity owners to either make a big strategic move and double down on the music business by buying EMI, or cash out. They acquired the company from Time Warner more than seven years ago — a long time frame for private equity investors, who normally prefer to own a company for three to five years before selling.
Late last year, Citigroup won a lawsuit against EMI’s private equity owners, Terra Firma, which had filed a suit that said Citigroup had defrauded Terra Firma during the auction of EMI in August of 2007. That deal, for $6.8 billion, came at the height of the credit boom — and just before credit markets began to freeze — and has been an ill-fated move for Terra Firma and its founder, Guy Hands.
K.K.R’s interest in Warner is related to expanding a joint venture it owns with Bertelsmann to license music rights. K.K.R. had been in talks with Warner Music about engineering a joint bid for EMI, but those discussions then turned toward K.K.R. buying Warner outright, according to one of the executives involved in the process.
Warner Music, whose artist roster includes Kid Rock, Green Day and Bruno Mars, is the only pure music company that is publicly traded. Others, such as Universal Music and Sony Music, are part of much larger conglomerates. A group of investors led by Edgar Bronfman Jr., a group that also included Bain Capital, Thomas H. Lee Partners and Providence Equity Partners, bought Warner Music from Time Warner in March of 2004 for $2.6 billion in cash. The company went public in 2005, and although the investors still control the company — only a small percentage of Warner’s stock is in public hands — the investors have already profited through hefty dividend payouts.
A Warner Music spokesman and a Goldman spokesman declined comment.
In a letter to shareholders sent last week, Mr. Bronfman wrote, “clearly many obstacles lie ahead, but our confidence in the company’s future prospects is based on our consistent track record and our proven ability to outperform the rest of the industry.” Indeed, as the overall music industry has shrunk remarkably over the last few years, Warner has shrunk less — and has actually improved its profit margins through cost-cutting.
According to the International Federation of the Phonographic Industry, which measures music sales globally, sales of music declined nearly 23 percent between 2005 and 2009. Over that time, Warner’s revenue declined much less — around 9 percent.
With the rise of the file-sharing Web site Napster in the late 1990s, the music industry was the first slice of the media business to see its economics disrupted by the digital age, and by the time Mr. Bronfman and his group bought Warner, that trend was clear. The decline of newspapers followed the diminishment of the music industry, and more recently the economics of television and film have also come under pressure from the Internet.
But unlike, say, newspapers and magazines, the music industry has embraced a durable model to get paid for selling music online through services such as Apple’s iTunes Store — even if revenue has declined and piracy remains rampant.