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HOW WILL EDGAR AND CO. MAKE WMG PAY OFF?

Speculation Still Rampant as to How Investors Will Make Fat Stacks of Dead Presidents. Meanwhile, S&P Stops Crawling up EMI’s Backside... For Now
The announcement of Edgar Bronfman Jr. and partners’ deal to buy Warner Music Group from Time Warner may now be two days old, but that doesn’t mean the reckless and wanton distribution of sheer speculation that may or may not be based on a shred of fact has to stop. You’re reading this, aren’t you?

Indeed, news of the deal has sparked furious debate as to how Bronfman, as the newly private WMG’s “most senior executive,” will approach the cost-cutting necessary to satisfy Thomas H. Lee, Bain and Providence—his new high-stakes, take-no-prisoners equity partners. Some say there simply isn’t much fat left in WMG, which has already been extensively restructured, and certainly not $200 million worth—now said to be the number required to generate returns acceptable to Thomas Lee Managing Director Scott Sperling, to whom Bronfman will reportedly be accountable.

If that’s the case, insiders say, one potential scenario making the rounds would involve the investors selling publisher Warner/Chappell for $1.2-$1.5 billion, then turning around and selling the record division to EMI for its previous bid of $1.6 billion, yielding a potential $500 million profit. Failing that, observers say, Sperling, Bronfman and Roger Ames are likely to cut where they can, as has been previously reported, by consolidating some U.S. label operations, shuttering underperforming international units and modernizing Warner/Chappell’s infrastructure.

Warner Bros., Atlantic and Elektra have each had good runs this year, with each of the latter two labels’ marketshares up some 30% over last year. And, thus far, Bronfman and Ames (who is said to have four years left on his current deal) are said to be hitting it off in a big way. Nevertheless, anxiety is reportedly running understandably high at WMG over how deep the inevitable cuts will be.

Meanwhile, as Bronfman denies rumors that his group will next bid to acquire EMI, many continue to suggest that the English are now ripe for a takeover. Investment firm Blackstone Group, a prominent player in EMI’s now-failed bid for WMG, may or may not be considering taking EMI private. Whether that or other buyout rumors are true, however, WMG’s higher-than-expected selling price is seen as likely to help boost EMI’s valuation.

And late yesterday, Standard & Poor’s Ratings Service announced it had removed EMI from its CreditWatch list, meaning it no longer feels an additional downgrading of  the company’s credit rating may be imminent. EMI is currently rated “BBB-/A- 3,” and we can’t tell you what that means exactly, because we don’t know.

S&P attributed the removal of EMI from CreditWatch to EMI’s confirmation that it had withdrawn its offer to acquire WMG. "The ratings have been removed from CreditWatch because the withdrawal of EMI's offer takes away uncertainty about how such a transaction might be financed," said S&P credit analyst Trevor Pritchard. "Furthermore, consolidation with another music major potentially might have lead to EMI being involved in a lengthy regulatory review."

While S&P’s outlook for EMI remains negative, there’s at least one heavyweight investor out there who isn’t dumping on the British company. In an interview with Bloomberg News, Talpa Capital Managing Director Frank Botman said, “I'd rather add EMI shares than sell them. I'm absolutely not planning on selling EMI stock.” Botman added, however, that he isn’t currently planning on increasing his company’s 4.1% stake in EMI.

“For me, buying Time Warner's music unit wasn't the key issue,” he continued. “The key is that I believe music companies have a future, especially if downloading of music from the Internet is legalized. Once that happens, all major record companies, including EMI, will benefit.''

Talpa Capital is the investment company of Dutch billionaire John de Mol, who developed TV’s Big Brother.
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