When Terra Firma bought EMI for the munificent sum of $4.7b two years back,Warner Music CEO Edgar Bronfman Jr. has been judiciously managing his label’s balance sheet to move on EMI when it eventually collapses under the weight of its debt. And that time is rapidly approaching, writes media reporter Peter Lauria in a N.Y. Post story today.
“An EMI-WMG merger has always made sense, and with WMG’s newly strengthened balance sheet and the lights dimming on EMI, the stage may finally be set for a merger,” said Pali Research analyst Richard Greenfield told Lauria yesterday.
WMG’s successful $1.1b bond offering yesterday occassioned the story. The new liquidy eliminates WMG’s entire $1.3b in bank debt. With the company’s $658m cash, Bronfman is starting to look a whole lot smarter these days.
At the same time as the bond offering, Moody’s Investors Service upgraded WMG’s debt rating based on WMG’s newfound financial stability.
WMG shares fell 2 cents to $5.90, but are up 95% so far this year.
Pop-punk band Green Day’s latest album, which is expected to sell around 200,000 copies, kicked off WMG’s second-half release schedule last week.
Meanwhile, EMI’s liquidity is a horror show, Lauria writes.
Earlier this month, the label disclosed unverified cash flow of $286m against a confirmed $5b debt load. So large is EMI’s debt that Terra Firma was forced last September to provide an “equity cure” of $23m to satisfy covenant obligations.
Lauria writes that music industry observers believe that Terra Firma is going to have to provide another cash infusion in August to avoid breaching debt covenants when Maltby, the holding company that controls EMI, reports earnings.
Citigroup, which controls EMI’s $5b debt load, can push the label into bankruptcy if debt covenants are breached.
WMG’s bond offering removes all covenant obligations and extends its debt repayment schedule out to 2016. Its debt interest expense will grow, however.
Bronfman’s moves give WMG greater financial flexibility so it can be opportunistic regarding acquisitions. And the company appears to have such designs in mind as a clause in its debt offering allows the bonds to be redeemed before 2013 “if a major music transaction occurs.”
Greenfield took that to mean that WMG is positioning itself “should a merger with EMI present itself.”
Warner Music has left EMI at the alter several times in the past. This time Bronfman may be singing ‘no more bollocks’ if and when he sits down to negotiate EMI’s surrender to the former Canadian hooch czar.
