Back in the Groove : Once Abandoned by Big Conglomerates, Record Companies Are Among Today’s Hottest Investments--and Drawing Astronomical Bids
Here’s a blast from the past:
Ten years ago, coming off its best year ever in 1978, the record business was heading into the worst slump in its history. Sales were plummeting. Previously successful independent labels such as RSO Records, Capricorn Records and Casablanca Records were on the way to going broke and would ultimately disappear. A number of large media and entertainment companies--ABC, MGM and 20th Century Fox among them--were bailing out, selling off their record divisions at fire-sale prices.
Many Wall Street analysts were saying the record business was just too unpredictable, too dependent on the fickle tastes of teen-agers, too flaky to be considered a sound investment.
What a difference a decade has made.
These days, record and music publishing companies are the hottest investment properties in the entertainment world. Fueled by historically high profits from compact disc sales, higher fees for the use of songs in advertising and movies, and an increased demand for music in a growing worldwide marketplace, acquisition fever has seized the U.S. music business.
Everyone, it seems, wants to buy in--Japanese electronics manufacturers, Hollywood movie companies, German publishing giants, even financially conservative investor consortiums. And coupled with the limited supply of available companies, the heated-up demand is driving prices to previously unimaginable levels.
“Things have gone crazy,” said Lou Maglia, president of Island Records, an independently owned, New York-based company that is the most sought after acquisition target.
According to Maglia, Island is entertaining offers from five of the six major record distributors--Warner Communications, CBS Records, EMI Music, Bertelsmann Music Group and MCA Records.
Expect $200 Million
“The discussions seem to be jumping in $25-million increments; it’s very exciting,” Maglia said.
Industry experts are predicting that Island--which boasts a substantial music publishing catalogue and a roster of 100 artists, including the Irish rock group U2--will fetch at least $200 million, about double its estimated value just a couple of years ago.
Capitol-EMI Music President Joe Smith likens the situation in the music business to the Beverly Hills real estate market. “The seller says to you, ‘Sure, the house is really only worth this much, but if you want to buy it, you’re going to have to pay me this much.’ ”
RCA Records President Bob Buziak chooses an East Coast analogy: “There’s always someone in New York who’s willing to pay a million dollars for a view of the river, forget about the apartment.”
Geffen Records Chairman David Geffen attributes the buying frenzy to increased competition among multinational corporations. “People are realizing that if you’re going to be a successful media conglomerate, it’s important to have a record company because of the cash flow they generate,” he said.
Les Bider, president of Warner Chappel Music, the world’s largest music publisher, agrees: “If you want to be a player, you cannot ignore the music component, because it’s a significant part of every other area in the entertainment industry. You don’t try to run a race on one leg.”
By all accounts, the inflationary spiral was kicked off two years ago when Sony Corp. bought CBS Records for an unprecedented $2 billion. At the time, many in the industry thought the Japanese had overpaid. Now, however, some think CBS may have been a steal at that price.
Experts point to the fact that, in late 1986, CBS Inc. President Laurence A. Tisch also sold CBS Records’ sister company, CBS Songs, a 250,000-song music publishing catalogue, to an investor group called SBK Entertainment World for $125 million. In January of this year, SBK was acquired by EMI Music Worldwide for nearly three times that amount, $370 million, by far the highest price paid for a music publishing company.
If the CBS song catalogue has tripled in value in just two years, the reasoning goes, how much is the record company worth on the open market today--$3 billion? $4 billion?
Indeed, since the CBS Records sale, a number of small independent labels have changed hands for sums that surprised the industry. Last June, MCA Records and the show business investor consortium Boston Ventures bought a floundering Motown Records for $61 million, more than twice what many experts thought the company was worth.
And last month, EMI Music paid $79.1 million for a 50% interest in Chrysalis Records, a London-based company that has been losing money in the United States. EMI is a division of the British consumer electronics giant Thorn EMI, which operates Capitol Records and EMI Records in this country. In acquiring the stake in Chrysalis, EMI outbid the West German publishing conglomerate Bertelsmann AG, whose Bertelsmann Music Group, or BMG, has stepped up its presence in the U.S. music business in the past few years, starting with the purchase of RCA Records in 1986.
The recent free-spending activities of EMI in particular shows that the music business is viewed in a positive new light.
The company’s 46-year-old president and chief executive, James G. Fifield, has been in the music industry for less than a year, having spent 20 years as an executive of General Foods Corp.
His present aim, Fifield says, is to build “the fifth-ranked record distributor into one of the top three companies in the world, to where it is spoken of in the same breath as CBS and Warner Communications.”
That won’t be easy. EMI’s record operations in the United States have not been profitable in the past few years, despite the new prosperity in the industry. Until recently, the company was considered a likely target for a takeover by one of the other multinational distributors.
Few Labels Left
But Fifield points to the parent company’s nearly half-billion dollars in acquisitions this year as evidence that EMI has no intention of getting out of the record business. In fact, he’s still looking for more companies to buy, he said. “We’re not tapped out yet.”
The problem is, there aren’t many successful labels left that aren’t already owned by large conglomerates--only Island, London-based Virgin Records and Los Angeles-based A&M; Records and Geffen Records. “All the rest of the independent companies together don’t add up to 2.5% of the business,” said one record company chief.
The industry wisdom is that Geffen and Virgin are definitely not for sale at this time. Some think that A&M; might be sold but only for an enormous price, between $500 million and $600 million. Which is why the current bidding for Island is so heated.
“Whoever buys Island is going to affect all the other companies,” said one top industry executive, pointing out that Island’s records are manufactured and distributed by Warner Communications in the United States, by MCA in Canada and by BMG overseas.
The company with the most at stake in the acquisition war would appear to be BMG, which recently lost the distribution of Chrysalis Records overseas to EMI. BMG also distributes A&M; in the United States.
“The loss of Chrysalis and Island would be a disastrous blow to BMG internationally,” said the president of a competing record company. “If they would also lose A&M; domestically, they could conceivably not qualify as a worldwide distributor and would have to put out the ‘for sale’ sign. The battle for A&M; will be one that either makes or breaks them.”
Already some in the industry are worried that, given the enormous cost of winning, the acquisition war might yield a Pyrrhic victory.
Project Sharp Growth
“I don’t know if I agree with throwing out these huge dollars to buy market share,” RCA’s Buziak said. “I don’t know if EMI can digest its recent acquisitions. You still have to have the wherewithal to run your company and develop new talent.”
Warner Chappel Music President Les Bider also sounded a cautionary note. “What I see going on is that, due to recent success of the music business as a whole, people are projecting a rate of growth in the future that validates these large purchase prices.
“It’s good for the seller because he’s getting part of the future benefit, but the buyer is paying for future growth instead of getting the benefit of it,” he said. “I guess the only argument is what rate of growth the industry will be able to sustain over a long period of time. Right now, the buyers’ projections exceed those of the sellers.”
The big worry is, after all the enormous outlays based on recent success and rosy predictions, what if the music business takes an unexpected downturn?
It’s happened before, exactly 10 years ago.