Warner Music IPO: magnifying Len

Home entertainment stocks have been hitting all the right notes for investors. With millions stuck indoors and in need of diversion, streaming services such as Netflix and Spotify and video game maker Nintendo have all seen a surge. 

Warner Music Group is looking to ride the wave. The music company behind Cardi B, Ed Sheeran and Bruno Mars, is pressing ahead with plans to raise as much as $1.82bn in an initial public offering. Potential investors should not get so jazzed though. For one thing, they will have no say in determining the company’s course. Billionaire Len Blavatnik will retain firm control of the group through supervoting shares.

Once dismissed as in terminal decline, the music business has enjoyed a renaissance in recent years. Streaming services convinced people to pay for music again. At Warner, revenue grew 12 per cent for two years to hit $4.5bn in fiscal 2019, when profit topped $250m. Goldman Sachs expects worldwide recorded music revenue to more than double to $45bn by 2030, with the bulk of the growth driven by streaming. 

The pandemic, which initially prompted Warner to put its IPO plans on hold, has done little to dull the shine. Streaming revenue actually grew 9 per cent year-on-year in April.

At the top end of the announced price range, Warner’s IPO will give the company an enterprise value of about $15.7bn, or about 21 times last year’s adjusted ebitda. By contrast, Vivendi sold a 10 per cent stake in Universal Music Group to China’s Tencent for an implied total enterprise value of €30bn. That works out to about 27 times UMG’s 2019 ebitda. The premium reflects UMG’s market-leading status. It made 60 per cent more in revenue than Warner last year.

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Still, the IPO will be music to Mr Blavatnik’s ears. He paid only $3.3bn, including debt, for Warner in 2011. After the IPO, he would retain 99 per cent of voting power through Class B shares held by his company Access Industries. Warner’s shares are only decent value for investors willing — like so many aspirant musicians — to cede control to a managerial Svengali.

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