Warner Music sale paves way for shake-up

An investment team led by Edgar Bronfman Jr. is expected to announce the close of its purchase of Time Warner Inc.’s global record division today, setting the stage for a massive restructuring aimed at slashing more than $200 million in costs and retrenching operations in more than 50 countries.

The restructuring is seen as a pivotal step toward positioning the conglomerate to ride out the music industry’s piracy woes and generate a return within five years for the former Seagram Co. chief executive and other members of the team.

The completion of the $2.6-billion purchase of Warner Music Group will close out Time Warner’s three-decade run in the music business and will make Warner Music -- home to such acts as Red Hot Chili Peppers, Sean Paul and Fabolous -- the world’s biggest private record company.

Beginning this week, sources said, Bronfman plans to shake up the management team, consolidate Warner’s two biggest East Coast units, the Atlantic and Elektra labels, and undertake a round of cutbacks in which about 20% of the conglomerate’s 5,300 workers are expected to be let go.

The moves probably will result in the ouster of veteran executives, including Atlantic Chairman Val Azzoli and Elektra Chairwoman Sylvia Rhone, sources said.

Jason Flom, a veteran Atlantic executive who heads its Lava Records operation, and Atlantic co-president Craig Kallman are expected to take senior roles in the combined East Coast division, sources said.

Tom Whalley, chairman of Burbank-based Warner Bros. Records, is expected to remain.

Bronfman is expected to name Roger Ames, who has run the Time Warner music giant since 1999, to the position of vice chairman of the worldwide company, sources said, although it remains unclear whether Ames would take the job. Bronfman already has hired former Universal Music executive Lyor Cohen to take charge of Warner’s U.S. operations.

The reorganization is certain to cause management discord and morale problems in the months ahead as Warner attempts to reshape itself. Competing label chiefs already are lining up to raid the company for executives and artists.

Deep cuts are expected to sweep the Atlantic and Elektra operations, which together employ about 400 people. Bronfman also is expected to fire about 20% of the 500 people who will remain at Warner’s music publishing unit, Warner-Chappell, after its print and sheet-music unit are auctioned off. Warner Bros. Records is expected to trim less than 10% of its staff.

Outside the U.S., Bronfman is expected to integrate the record giant’s operations in major markets and pull out of countries in Latin America where it is underperforming, sources said. In many of the biggest countries, Warner markets and promotes music through two distinct labels, WEA and EastWest, and Bronfman probably would merge the two in most cases, sources said.

The Bronfman plan is to expand on Ames’ past efforts to bring a more cost-conscious approach to producing and marketing music. Insiders speculated that the company probably would spend as much as $50 million less this coming year on artist-and-repertoire-related expenses.

Today’s expected announcement would follow a weekend of financial meetings and weeks of closed-door integration planning. Insiders at the label divisions have been bracing for sharp cutbacks, with many already pursuing other jobs.

“The place is like a morgue,” said one senior label executive who spoke on condition of anonymity.

The acquisition marks a second chance for Bronfman to dominate the music industry. In the mid-1990s, the heir to the Seagram liquor fortune engineered a series of multibillion-dollar deals to create Universal Music Group, the world’s biggest record conglomerate and home to acts such as U2 and Ja Rule. He later sold the unit to French giant Vivendi.

With the industry suffering from worldwide piracy, Bronfman hasn’t been predicting a rapid turnaround. He has said he expects industry declines for at least two more years. But he is counting on exploiting for-fee online music services to bolster sales in the future.

And there are indications that the worst of the industry’s slump is over: U.S. album sales have seen a double-digit jump this year compared with last. The first quarter, however, usually accounts for a small share of annual sales.