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"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."
——Pali’s Rich Greenfield
BREAKING NEWS: SOME NOW BELIEVE EDGAR MAY HAVE A CLUE!
With Debt Now Handled Via Bond Offering, Will WMG Take Another Crack at Creating WEMI?
Since Terra Firma bought EMI for the wildly inflated price of $4.7 billion two years ago, Warner Music chief Edgar Bronfman Jr. has been judiciously managing his label's balance sheet to move on the British company when it eventually collapses under the weight of its debt. And that time is rapidly approaching. So says media reporter Peter Lauria in a story appearing in today’s edition of the N.Y. Post.

"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," Pali Research analyst Rich Greenfield told Lauria yesterday.

The story was occasioned by WMG's successful $1.1 billion bond offering yesterday, which allows the #3 music group to eliminate its entire $1.3 billion in bank debt. That coup, along with the company's $658 million cash hoard, “has Bronfman looking a lot smarter,” writes Lauria, noting that the much-criticized mogul “rarely gets credit for his managerial skills.”  

Some observers were shocked that sophisticated investors like Capital Research and Management and BlackRock bought into the bond offering, sources told Lauria. At the same time, Moody's Investors Service upgraded WMG's debt rating based on the offering. That follows a catalytic upgrade last month from Goldman Sachs analyst Ingrid Chung, followed last week by a stunning change of heart on the part of Greenfield, who long had been one of WMG’s harshest critics.

"[The offering] should remove any and all liquidity fears in the market, even before WMG begins to benefit from a stronger back-half fiscal 2009 release schedule," Greenfield wrote in a report.

WMG shares fell 2 cents to $5.90, but are up 95 percent so far this year.

As for EMI, Lauria characterizes the company’s liquidity as a “horror show.”

“Earlier this month, the label disclosed unverified cash flow of $286 million against a confirmed $5 billion debt load,” Lauria writes. “So large is EMI's debt that Terra Firma was forced last September to provide an ‘equity cure’ of $23 million to satisfy covenant obligations. 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 $5 billion debt load, can push the label into bankruptcy if debt covenants are breached.”

Meanwhile, WMG's bond offering removes all covenant obligations and extends its debt repayment schedule to 2016, though the company is taking on increased interest. This gives Bronfman greater financial flexibility should he choose to make another run at EMI. The kicker, Lauria points out, is that a clause in WMG’s 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."

Don't look now, but here we go again…

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