Warner Music Group to be listed on Nasdaq

(Guglielmo Santamaria)

On May 26 Warner Music Group confirmed its upcoming IPO by filing a S-1/A amendment to its S-1 form with the US Securities & Exchange Commission. WMG’s listing on the Nasdaq stock exchange is one of the most anticipated of the year, and was supposed to take place in the month of March, but was delayed to June 2 due to the pandemic. Together with Sony Music Entertainment and Universal Music Group, the company is one of the world’s three biggest record labels, known as the Majors, which control between 65 and 70% of the global market share of the music industry. Warner is home to extremely popular acts, including Ed Sheeran, Coldplay, and Cardi B.

The IPO

WMG is making 70 million shares of Class A common stock available, which make up 13.7% of the firm’s common stock, and anticipates the offering price to be between $23 and $26 per share. With the help of a little math we can discern that the expected evaluation of the whole of WMG ranges between $11.7bn and $13.3bn. Together with Warner’s $2.9bn of current total debt and its current cash/cash equivalent position of $487m, this brings us up to around $16bn of total Enterprise Value. Each Class A share will be entitled to one vote, while each Class B share, held by Access Industries, LLC, will carry twenty votes, de facto guaranteeing this American group full control over Warner. WMG’s S-1 form cites 28 underwriters involved, represented by Morgan Stanley & Co. LLC, Credite Suisse Securities (USA) LLC, and Goldman Sachs & Co. LLC.

Blatavnik’s Masterpiece

Warner Music Group was acquires and taken off the stock market by Len Blavatnik’s Access Industries in 2011 for a $3.3bn cash transaction at the price of $8.25 per share. This purchase came at the time when the market outlook was very different, and the company’s stock was definitely riskier. But this investment seems to have paid off brilliantly for Blavatnik, who is going to recover all the money spent on the purchase, while maintaining majority ownership and near-total voting power. Here’s how.

Since 2017, Access Industries has extracted $1.3bn in dividends; to this we may add $1.8bn, assuming all 70m shares are sold at the price of $26 each, reaching $3.1bn. If then the underwriters exercise their greenshoe option and purchase up to 10.5m additional shares, at the same price, we obtain another $273m (minus fees), which adds up in total to around the original cost of the operation. Still, Access will retain approximately 99.2% of the total combined voting power of the outstanding stock, therefore being able to confidently dominate future decision-making.

State of the Market & Analysis

Is Access Industries right to confident to expect high market interest for this IPO? We now explore some reasons why this might be the case, and other because it might not.

After Nasdaq’s Composite Index fell to its lowest point in mid-March, it has presented steady recovery as investor have shown confidence that the worst part of the pandemic is behind us. Still, particular tensions surrounded IPO listings in early May, after multiple fraudulent cases, including that of Luckin Coffee. The Chinese company reportedly overstated sales by hundreds of millions of dollars, losing 91% of its peak value, and forcing Nasdaq to allow for tighter listing standards.

Nevertheless, the music industry is in good shape and attracting investors’ attentions. In its annual Global Music Report, released in May, the International Federation of the Phonographic Industry reflected on a positive year for the sector, its fifth consecutive year of growth, doing so by 8.2% in 2019. In the years between 2001 and 2014 revenues for the recorded music industry had fallen dramatically at the hands of illegal download Source: IFPIwebsites.

The sector’s recovery was by the success of streaming platforms, that now represent 56.1% of total revenues (they were only 2.7% of the sector in 2010). Streaming’s 22.9% growth in 2019 allowed the IFPI to look confidently ahead, despite having to admit uncertainty due to the pandemic, as well as registering fall in revenue from the physical and download markets.

In this context, the news of WMG’s renewed partnership with Spotify will certainly be attractive to potential investors. The move comes after the end of a long dispute between the streaming platform and Warner’s Indian publishing arm, that had led to the absence of Warner artists from one of the world’s biggest entertainment markets. This will allow WMG to grow in India, where streaming companies are aggressively trying to expand.

Still, there are some causes for doubt, if not even concern, on the market. Firstly not only WMG, but also its biggest rivals UMG and Sony Music, have experienced decreasing quarterly growth of the streaming sector in 2019. This deceleration comes naturally, as key markets such as the developed countries near capacity and mature. This may not be a substantial problem, but paired with growing A&R costs, may raise questions from investors.

The Artist & Repertoire voice on the balance sheet Source: Rolling Stonemainly covers the cost of paying royalties and signing artists. A&R costs represented 29.4% of Warner’s 2011 revenue, but have grown up to 32.7% in 2019 because of artists’ increased contractual requests.

All this may be counterbalanced, however, if ByteDance’s talks with Warner regarding global licensing deals for a new music subscription are successful. The Chinese company behind the popular app TikTok could breathe new life into the digital market, incentivising additional growth through more entertaining ways of listening to music.

Predictions

Our prediction is that WMG will successfully meet the top-end of its estimate, at around $26 per share. This comes on the basis of general interest on the market, signalled for instance by Tencent’s $3.4bn purchase of 10% of UMG’s stock. Moreover, there are several reports of contacts between Access Industries and the Saudi-controlled Public Investment Fund. The music’s industry positive prospects and the recent news regarding WMG’s expansion on streaming platforms will lead it to a successful flotation. We await June 2 to witness the actual IPO.

We here include WMG’s “Summary of Historically Consolidated Financial Data” contained in its S-1/A form.

DEFINITIONS

IPO= an Initial Public Offering consists in offering shares of a previously private corporation to the public in the context of a new stock issuance.

S-1 Form= an S-1 form is the initial registration form for new securities required by the Securities and Exchange Commission (SEC) for US-based public companies in order for them to be listed on a national exchange, and therefore for an IPO to be executed. The form provides information regarding the planned use of capital proceeds, current business and competition details, and the security’s prospects. Any changes or amendments are filed under Form S-1/A.

Class A Share= Class A shares are typically accompanied by different and often more desirable qualities than Class B shares, such as more voting rights and priority in receiving dividends. Nonetheless, the opposite may also be true on some cases, in which management retains control of the company my holding Class B shares with more voting power.

Enterprise Value= Enterprise Value measures a company’s total value as the sum of Market Capitalisation plus Total Debt minus Cash and Cash Equivalents (EV=MC+D-C).

Underwriter= an underwriter evaluates and assumes another party’s risk in exchange for a fee. In the context of an IPO, underwriters are typically investment banks that appropriate regulations are followed, and contact potential investor to evaluate interest on the stock.

Greenshoe Option= A greenshoe option is a clause contained in an S-1 form that allows underwriters to buy up to an additional 15% of company shares at the offering price.