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According to both various press reports and the conventional wisdom of what you do after buying a money-losing operation, Bronfman’s first order of business is to cut costs at Warner.

WHAT’S NEXT FOR WMG AND EMI?

As the Dust Settles, Speculation on Future of WMG, EMI, Music Industry Begins
Hey, you just helped engineer a $2.6 billion buyout of a global music company, pulling together equity capital companies and beating out EMI for the Warner Music Group. Now it’s time to get to work, Edgar.

According to both various press reports and the conventional wisdom of what you do after buying a money-losing operation, Bronfman’s first order of business is to cut costs at Warner. Equity firms like to see a 15-20% return on investment, so the pressure is on for immediate action. The N.Y. Post suggests that this will be accomplished by layoffs and merging Elektra into Atlantic. Estimates for the total amount Bronfman is looking to save range from $150 million-$300 million.

Hey, you just lost out on trying to buy WMG, your third failed merger attempt. What are you going to do now, EMI and Eric Nicoli? That all depends on who you ask or what you read. If you read the Post, private equity group Blackstone, which the paper reveals has a close relationship with EMI, may try to buy the company. EMI spokespeople have denied that report, which first surfaced in the London Observer.  

Since private equity buyers often look for low-debt companies which are overspending as acquisitioin targets, they must then cut costs to increase earnings. According to the N.Y. Times, EMI’s debt ratio is three times EBITDA—earnings before interest, tax, depreciation and amortization—giving its stock junk status. In addition, cost-cutting under Alain Levy and David Munns leaves little room for additional savings. This makes EMI an unlikely takeover candidate by a private equity group, according to analysts who spoke with the Times.

To give it more perspective, Variety notes that WMG's estimated EBITDA earnings are believed to be in the neighborhood of $215 million, making the Bronfman group’s offer 12 times earnings.

Here’s what is for sure: It’s going to be interesting.

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