Time Warner: Bronfman the Man

Diddy or Didn't He?

What's Next for WMG and EMI?

Reprinted with permission from Hits Magazine

November 24, 2003

It's going to be a week of giving thanks at Time Warner, as the company has announced today that it is accepting the $2.6 billion bid from Thomas H. Lee Partners, Edgar Bronfman, Jr.'s Lexa Partners, Bain Capital and Providence Equity Partners to buy Warner Music, including Warner Chappell publishing. TV mogul Haim Saban, who was in, then out, then in again, was finally not included among the announced investment group. The company will continue to be called the Warner Music Group.

As part of the agreement, Time Warner will have the option to buy a 15% stake in Warner Music three years after the deal closes at a 25% discount from assessed market value. Time Warner will also have an option over a 19.9% share if Warner merges with another music company. Time Warner's debts have been pared to $24 billion after the company sold its manufacturing facilities to Canadian company Cinram for $1.05 billion last month.

Terms of the deal are being reported as $1.35 billion of equity and $1.2 billion of debt, with Boston-based private equity group Thomas H. Lee taking the largest single stake, at $600 million equivalent to almost half of the equity, with Bain at $350 million, Bronfman $250 million and Providence Equity $150 million, according to Reuters. Private equity group Quadrangle had been included, but is reportedly no longer in the mix. The deal is subject to the "customary regulatory reviews," according to the release, and is expected to take "up to 60 days" to close.

Hours before the announcement, bridesmaid EMI issued their own statement withdrawing from the running, and indicating they won't get back into the bidding even if a snag should develop in the Bronfman-led acquisition.

EMI Chairman Eric Nicoli, with nothing to show for three separate merger attempts now, admitted: "We have concluded that it is no longer possible to reach an agreement on terms which would be acceptable to both parties and in the interests of EMI's shareholders."

Now comes the part where everybody says nice things about the deal.

Bronfman: "Warner Music Group is one of the world's greatest recorded music and music publishing companies, and we have great faith in its potential for growth as an independent company and in the long-term opportunities of this industry. We have brought together a highly sophisticated and well-financed group of investors to support the business. I personally look forward to working with Roger Ames and his outstanding management team to build on Warner Music's strengths, including its distinguished tradition of entrepreneurship and artist development. Together, we will continue to drive towards Warner Music's full potential."

Thomas H. Lee Partners Managing Director Scott M. Sperling commented: "We look forward to partnering with Warner Music Group's talented management to build upon its world-renowned franchise and industry-leading brands. While we do not foresee an immediate upturn in the overall market for recorded music, we believe opportunities are emerging that bode well for the long-term future of the business and that Warner Music will continue to be in the forefront of capitalizing on these opportunities."

Time Warner Chairman/CEO Dick Parsons added: "I'm very pleased that we are putting our music company in such capable hands. Despite my personal fondness for the music business as well as for all of our wonderful managers and music group employees, I believe that this transaction is clearly in the best interests of our company's shareholders. Not only will it greatly enhance our financial flexibility, it also will enable us to pursue higher growth opportunities in our other lines of business. At the same time, we expect to continue to work closely with Warner Music, and we are happy to have the option to participate in the music industry's eventual recovery. We thank Roger Ames for his superb leadership of the Warner Music Group over the past four years, and offer him and all of our music colleagues our best wishes."

Time Warner's Entertainment & Networks Group Chairman Jeff Bewkes said: "With this investor group's deep commitment to the music business, we believe this deal is the best outcome for the people of our music company, our stellar roster of artists and their millions of fans around the world. Even with this sale, we look forward to continuing to work closely with Warner Music through a number of productive relationships involving our other divisions. Finally, we appreciate the tremendous efforts of Roger and his management team in strengthening Warner Music and helping to make this deal happen."

Warner Music Group Chairman/CEO Ames added: "I have every confidence that Warner Music will thrive under Edgar's leadership. His passion for the music business is clear, and his understanding of the creative process will be enormously important. It's an exciting chance to return to the independent roots that the music industry was built upon with what will be one of the world's largest independent music companies. These factors, along with the solid foundation we've built at the Music Group, mean we're very well positioned to take advantage of the technological advances that are spurring the industry's next phase of growth. I look forward to working with Edgar, as we strive to master the challenges our industry is facing."

HITS magazine is the most powerful information vehicle in the music industry, and is read religiously by all the top executives and everyone else.

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Reprinted with permission from Hits Magazine

N.Y. Post's Page Six reports P. Diddy threw a conniption at last week's VH1 Big in '03 awards when he found out he was not receiving one himself. Diddy showed up at the Universal Amphitheatre with a huge entourage in tow to present the Big Styling '03 award to Ashton Kutcher, but refused to go on unless he got something, too. VH1 hastily made up a Big Maverick '03 award for Eve to give P. before he brought on pal Kutcher. Combs rep has denied the charge. The show airs this Sunday night (11/30) on VH1. Meanwhile, the Diddymeister assuaged his hurt by buying ex-Sony chief Tommy Motolla's 17,000 sq. ft. Miami mansion for north of $20 million. The Star Island home has a screening room, private dock and an entire wing of the house where Mariah Carey once stored her shoes. Diddy will ring in Thanksgiving tonight at N.Y.'s Roseland with his made-for-MTV group Da Band and DJs Clue, Johnny Vicious and Tony Draper.

HITS magazine is the most powerful information vehicle in the music industry, and is read religiously by all the top executives and everyone else.

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Reprinted with permission from Hits Magazine

November 25, 2003

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.

HITS magazine is the most powerful information vehicle in the music industry, and is read religiously by all the top executives and everyone else.

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