Warner Music Shares Fall on Opening Day

After traders were serenaded by Led Zeppelin guitarist Jimmy Page at the opening bell, Warner Music Group Corp. was left dazed and confused by Wall Street’s reaction Wednesday to its initial public offering.

Already humbled by a significant reduction in its offering price, Warner shares fell 3.5% in first-day trading on the New York Stock Exchange, slipping 60 cents to $16.40. The shares fell to as low as $15.75 in early trading but climbed for the rest of the session. Warner priced its shares at $17 on Tuesday night, down more than 20% from a hoped-for $22 to $24 a share.

Almost 19 million shares were traded Wednesday, or nearly 60% of the 32.6 million shares sold by the company Tuesday.

Although opening-day performance has little effect on the long-term value of a company’s stock, market experts said a first-day drop was the Wall Street equivalent of a black eye.

“A pure music company in a declining market is not attractive to investors,” said Tom Taulli, co-founder of IPO research company CurrentOfferings.com. “This company still has significant amounts of debt. The stock market is unstable right now. Put all that together and it’s hard to be excited about this stock.”

Warner -- the fourth-largest music company and home to such acts as Madonna, Green Day and Kid Rock -- has spent recent weeks wooing Wall Street. But the company wasn’t able to overcome negative analyst reports regarding Warner’s prospects and a threat of a work stoppage by one of its marquee bands, Linkin Park.

First-day dips aren’t rare. About 17% of U.S. public offerings from 2001 through 2004 declined on their opening day, according to data tracking firm Thomson Financial. About one-third of those showed positive returns in the next two years.

Warner’s weak debut means smaller returns for the consortium of private equity investors who purchased Warner Music in March 2004, including Chief Executive Edgar Bronfman Jr. and Thomas H. Lee Partners. By law, the owners are prohibited from selling their shares for at least six months.

The company sold a 22% stake to the public, raising about $556 million. The offering’s proceeds will go to repaying a portion of the more than $2 billion in debt the company has amassed in the last year.

In earlier filings with the Securities and Exchange Commission, Warner indicated that its owners hoped to raise an additional $100 million for the company, sell $124 million in personal stock and award themselves more than $200 million in special dividends and fees. The management group -- which recouped its original cash investment within 10 months of purchasing the company from Time Warner Inc. for $2.6 billion -- still will receive a $75-million fee, but other dividends and personal sales were canceled.

“This is all about investors finally waking up and realizing they don’t want to be involved with companies that have big names but are solely about enriching private equity firms,” said David Menlow of research firm IPO Financial Network.

In a memo to Warner Music employees, Bronfman blamed an underperforming market for the stock’s discounted price and said eligible employees could expect to receive bonuses in connection with the IPO within a few weeks.

Analysts say the company still has a long stairway to climb.

“This poor opening will be a cloud over this company for at least the next few years,” said Richard Greenfield, an analyst at Fulcrum Global Partners.