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Did Sony Overpay By $250 Million For Its Music Label? Or More?

howard-stringer.jpgThe music business continues to decline, but Sony's Howard Stringer is determined to make a go of it anyway, and he's willing to pay a premium. He's just purchased partner Bertelsmann's 50% stake in the Sony BMG joint venture. In an oddly structured deal, Sony will end up spending about $1.2 billion on the deal, but will end valuing Bertelsmann's half at $900 million.

The details, via a Sony release:

First, a portion of Bertelsmann’s interest in
SONY BMG will be redeemed for approximately $600 million of cash by SONY BMG
(SONY BMG has not been consolidated by Sony and will not be consolidated until after
this transaction closes).  Sony’s U.S. wholly-owned subsidiary, Sony Corporation of
America, will then purchase the remaining interest from Bertelsmann for approximately
$600 million.  As a result, Bertelsmann will receive approximately $900mm in value for
its 50% stake plus $300mm of its share of cash on Sony BMG's balance sheet.  Sony
views this as approximately $600mm net cash cost as it does not consolidate Sony BMG’s
cash.

By our count, that would imply a total value of $1.8 billion for the whole company. That's a little less than half of Sony BMG's 2008 FY revenues of $3.9 billion, and about 11x net income of $178 million.

By comparison, Warner Music Group (WMG) which has similarly sized revenues ($3.46 billion) is trading at a .34 price/sales ratio. Warner comes with a good-sized publishing catalog, and the music publishing business (which deals with the rights to song compositions, not the song recordings themselves) is in relatively decent shape. But Sony BMG doesn't include publishing rights: Bertelmann sold its publishing business to Universal Music Group last year, and Sony's valuable publishing business has long been separate from its music label.

But for argument's sake, let's say the two are apples-to-apples comparisons, anyway. Applying that same .34 ratio to Sony BMG's $3.9 billion sales (it's actually shrunk in last three months, but bear with us) implies a value of $1.3 billion for the company. Which means that Sir Howard should have been paying about $650 million instead of the $900 million. That seems like an awfully steep premimum for an asset that's going to keep shrinking for some time to come - in a best case scenario.

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Excerpts from three releases follow:

Main deal announcement:
New York, August 5, 2008 – The international media and entertainment companies Sony Corporation and Bertelsmann AG today announced that Sony has agreed to acquire Bertelsmann’s 50 percent stake in Sony BMG. The music company, to be called Sony Music Entertainment Inc. (SMEI), will become a wholly owned subsidiary of Sony Corporation of America. Sony and Bertelsmann AG originally created the Sony BMG joint venture in August 2004...

Once the transaction is completed, Sony Music Entertainment Inc. will be comprised of premier music labels such as: Arista Records, Columbia Records, Epic Records, J Records, Jive Records, RCA Records and Zomba. Key recording artists will include Celine Dion, Alicia Keys, Yo-Yo Ma, Bruce Springsteen, Justin Timberlake, Usher and Jay Chou.
 
As part of the transaction, the parties have also agreed to continue to share the company’s manufacturing and distribution requirements between Sony’s manufacturing subsidiary, Sony DADC, and Bertelsmann’s services company, Arvato Digital Services GmbH (“Arvato”), by extending the agreements with Arvato for additional terms of up to six years. In addition, Bertelsmann will be taking over selected European music catalog assets from Sony BMG.

Financial details
The transaction will be structured as follows:  First, a portion of Bertelsmann’s interest in
SONY BMG will be redeemed for approximately $600 million of cash by SONY BMG
(SONY BMG has not been consolidated by Sony and will not be consolidated until after
this transaction closes).  Sony’s U.S. wholly-owned subsidiary, Sony Corporation of
America, will then purchase the remaining interest from Bertelsmann for approximately
$600 million.  As a result, Bertelsmann will receive approximately $900mm in value for
its 50% stake plus $300mm of its share of cash on Sony BMG's balance sheet.  Sony
views this as approximately $600mm net cash cost as it does not consolidate Sony BMG’s
cash.   
 
In addition, Bertelsmann will be taking over a limited amount of selected European music
catalog assets from SONY BMG.  These catalogs represented approximately $20 million
(less than 1%) of SONY BMG’s revenues in calendar year 2007.  The parties have also
agreed to continue to share the company’s manufacturing and distribution requirements
between Sony’s manufacturing subsidiary, Sony DADC, and Bertelsmann’s services
company, Arvato Digital Services GmbH (“Arvato”), by extending agreements with Arvato
for additional terms of up to six years.   

 The closing of the transaction is subject to a number of conditions, including approvals of

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regulatory authorities in certain jurisdictions.

Berteslmann plans for remaining music assets:
he international media company Bertelsmann is gearing the business of its Bertelsmann Music Group (BMG) towards music rights management. The realignment is connected with the sale of Bertelsmann’s stake in the Sony BMG Music Entertainment joint venture to the Sony Corporation of America. Bertelsmann is taking over selected European catalogs of music rights from Sony BMG as part of the transaction. They comprise the works of more than 200 artists. The catalogs will continue to be distributed by Sony Music.
 
Taking over these catalogs is an important step towards the planned establishment of a licensing and management platform for exploiting and marketing music rights under the BMG brand. The designated managing director of BMG, based in Berlin, is Hartwig Masuch, an experienced music industry executive, who most recently advised Bertelsmann in the negotiations with Sony. Maximilian Dressendörfer, Vice President BMG, will also be part of the management team.
 
Bertelsmann’s Chief Financial Officer Thomas Rabe, who is responsible for the music division on the group’s Executive Board, stated: “The many new distribution paths are causing an increase in the demand for music use rights. In view of this fact, we believe that building a business for the management and exploitation of such rights in Europe is an attractive proposition. We want to take advantage of our opportunities and position ourselves with the strong, well-established BMG brand and a management that is highly regarded in the market”.

 

 

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