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Warner Music IPO, but who's buying?
Smallest major label decides to go public as the music industry at large flounders.
March 11, 2005: 6:38 PM EST

WASHINGTON (Dow Jones) - Investors interested in owning the smallest major record label in a struggling music industry got the heads-up on Friday: Warner Music Group Corp. is going public.

The New York company's filing for an initial public offering, which was widely expected, comes nearly a year to the day after a private-equity group led by Edgar Bronfman Jr. purchased Warner Music from Time Warner Inc. (TWX).

Warner said in the filing it wants to raise as much as $750 million through an IPO led by Goldman Sachs Group Inc. (GS) and Morgan Stanley (MWD). No date, share price or size has yet been set for the offering, which will be used to fund general corporate expenses and pay down debt.

Warner, which boasts acts ranging from Madonna to Linkin Park, is the smallest of four major music labels in an industry that some critics believe is troubled at its core.

After years of growth in the 1990s, the industry began experiencing declines in 1999. The movement of music sales away from smaller record shops and toward cut-rate discounters like Wal-Mart Stores Inc. (WMT) and Internet retailers like Inc. (AMZN) has created more price competition. The sector is dominated by two behemoths - Universal Music, a unit of Vivendi Universal (V), and Sony BMG Music Entertainment, which together control more than 50% of the market and make for formidable competitors. Sony BMG Music Entertainment is a joint venture between Sony Corp.'s (SNE) Sony Corp. of America and Bertelsmann AG (BRT.YY).

Warner Music and its competitors have blamed the industry decline on illegal Internet downloads of music. But some critics have blamed it on the industry's own reliance on and overpayment to established music acts, some of which haven't proven to have staying power. In Warner Music's filing with the Securities and Exchange Commission Friday, it cited its reliance on established acts as a strength, boasting that less than 10% of its total revenue depends upon new artists without track records.

The effects of the industrywide decline could be seen in Warner Music's financials even before Bronfman and his posse of private-equity supporters bought it last year. In 2002, former parent Time Warner wrote down the valuation of its music business, and the goodwill impairment charges continued into 2003.

Warner Music's filing with the SEC points to some promising industry statistics showing that U.S. music sales improved in 2004 and global sales improved in the first half of 2004 compared with 2003. The company's most-recent financial data available, for the three months ended in December 2004, also appears to be promising at first, with Warner Music earning $36 million , up from a loss of $1.15 billion in the same period of 2003.

But a closer look reveals that in the 2004 period revenue fell 8% from a year earlier. Warner was able to top its year-earlier results because it was comparing against a whopping $1.02 billion goodwill impairment - to further write down the impaired value of its music business - that had dragged down its 2003 results.

The company also revealed in its filing that it faces some potentially troubling issues in its own accounting. In the course of testing its internal financial controls, now required under the Sarbanes-Oxley Act, Warner Music's outside auditors found a number of significant deficiencies that are considered "material weaknesses." A material weakness means there is a likelihood that a material misstatement of financial results will not be prevented or detected. Warner Music said it is working to fix the deficiencies, which range from the need for a tax group and an internal audit department to the absence of a uniform royalty system.

On the plus side, Warner Music is working to get its costs under control through a restructuring plan that projects annual savings of $250 million . One- time costs of the restructuring will be between $225 million and $250 million , of which $140 million was already recorded during 2004.

Bronfman, the scion of the Bronfman family that built up beverages company Seagram, pulled down an annual salary in 2004 of $1 million and a bonus of $5.25 million, the SEC filing showed. Bronfman began his career in the music industry as a songwriter for Dionne Warwick and Celine Dion . He later headed up Seagram, acquiring record companies that at one point made its Universal unit the largest record company in the world, before selling to Vivendi in 2000.  Top of page


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