Could BMG’s Parlophone bidding result in KKR rethinking its involvement in the music rights firm?
By CMU Editorial | Published on Tuesday 23 October 2012
BMG’s success, or not, in acquiring the EMI record label assets being sold by Universal Music could have an impact on the business partnership between Bertelsmann and equity group KKR, joint owners of the version two BMG company, or so says the New York Post.
Having sold its original major record company and music publishing business (to Sony and Universal respectively), Bertelsmann re-entered the music industry in 2008 with the creation of BMG Rights Management, which became a joint venture with KKR the following year.
BMG has since been on an acquisition spree, particularly in the music publishing space, perhaps most notably buying the Chrysalis publishing company in the UK. Though bids for Warner and EMI Music Publishing, which would have resulted in the BMG music business again becoming an undisputed major-player over night, were both unsuccessful.
It’s now thought that BMG will bid for various EMI assets being sold off by Sony and Universal, which acquired the EMI record company and publishing business respectively, and both of which are being forced to divest units and catalogues in Europe as a condition of regulator approval for their EMI deals. As much previously reported, the divestment obligations put in place by the European Commission were much higher on Universal, which is being forced to sell the Parlophone business and Chrysalis sound recordings catalogue in the UK, and other units elsewhere in Europe.
Although the v2 BMG is an ‘integrated music rights’ business interested in both sound recording and publishing rights, most of its acquisitions to date have been in the latter domain. The firm has also insisted throughout that it has no interest in becoming a traditional record company, taking considerable risks investing in new talent in return for complete rights ownership, instead preferring artist partnerships on the recordings side.
Quite how this aim would fit with acquiring a traditional record company like Parlophone isn’t clear, and you sense BMG are still working out how acquiring that EMI UK division could fit into its own long term objectives. What we do know from both the Warner and original EMI bidding processes, though, is that BMG management have no appetite for rampant bidding wars that could lead to them over-paying for high profile catalogues.
However, the Post says that KKR, whose commitment to BMG, as a private equity group, will be much more short term than that of Bertelsmann, is getting impatient, and is increasingly pushing for a landmark deal that gives the firm considerable size and market share overnight. Parlophone arguably is that deal. Leading Post sources to suggest that if BMG fails to secure that acquisition, KKR might look to exit its joint venture with Bertelsmann sooner than planned.
That said, there seems little evidence of tensions between the two partners in BMG at the moment, and in the main conservative private equity types prefer businesses that are careful of bidding wars that may result in over-paying for new assets. And one of the Post’s own sources admits that, even if BMG is outbid for Parlophone, KKR is unlikely to start actively looking to offload its stake in the music company for another year. That would put us in KKR’s fifth year of investment in v2 BMG, meaning the equity group might be reasonably looking to exit the joint venture anyway under a standard private equity timetable.
When KKR does sell its 51% stake in BMG, which will happen eventually even if not on the faster-than-expected timeframe being mooted by the Post, it will be interesting to see whether Bertelsmann can afford to buy its partner out, or whether another player might come into the mix. Perhaps that could result in the BMG/Warner merger we’ve decided, somewhat randomly, to start predicting now all the hoo and the haa of the long-lasting EMI sale saga is almost over.