Michael Jackson, the Grateful Dead and “The Sound of Music” are finding new fans in pension funds, private equity and banks convinced that old hits will play on as technology expands the way people use music.
Competition is increasing for music publishing catalogs and the income they generate from stores, radio and Web play, ads and movies. Last month KKR & Co, the private-equity firm run by Henry Kravis and George Roberts, bought a majority stake in Bertelsmann AG’s music-rights unit.
Unlike recorded music, publishing is buffered from falling CD sales by its more diverse revenue sources. Owners can earn cash returns of 7 per cent to 20 per cent or more a year, depending on the songs and how they’re marketed, investors and dealmakers say. Jackson’s June 25 death has heightened interest in his stake in a catalog that includes Beatles tracks.
“Music-publishing assets can be equivalent to great real- estate investments,” said John Frankenheimer, co-chairman of Loeb & Loeb, a Los Angeles-based law firm involved in several sales. “You have to do the analysis to understand the difference between prime beachfront property, a distressed asset with great potential and a run-down property.”
Publishers own rights to lyrics and melodies. The biggest owners continue to be record labels, such as Vivendi SA’s Universal Music Group and EMI Group Ltd. In addition to KKR, recent buyers have included private-equity firms Pegasus Capital Advisors LP and Spectrum Equity Investors, the Dutch pension fund Stichting Pensioenfonds ABP and Credit Suisse Group AG.
“I view it as a very conservative investment,” said Rodney Cohen, co-managing partner at Pegasus Capital, a $2 billion fund with offices in New York. “They will always have value, and as long you buy properly you have a tremendous amount of downside protection and tremendous upside potential.”
Pegasus bought Spirit Music Group in April, gaining songs from the Grateful Dead, Elvis Presley, Frank Sinatra and Billie Holiday. Spectrum Equity’s holdings include Bug Music, which oversees roughly 250,000 copyrights.
Publishing isn’t risk free, said Donald Passman, an entertainment attorney with Gang, Tyre, Ramer & Brown Inc in Beverly Hills, California. The health of the music industry, falling retail sales and smaller ad budgets contributed to a 40 per cent to 50 per cent drop in the value of publishers in the past five years, he said.
“The music business is skittish, and there is a potential that income will drop for the next few years before the ship rights itself,” said Passman, author of “All You Need to Know About the Music Business.”
Falling values are attracting investors, Passman said.
KKR agreed to pay ¤250 million ($347 million) for the stake in Bertelsmann’s music-rights unit, said two people with knowledge of the situation.
The group clinched its first deal last month, buying Los Angeles-based Crosstown, owner of an 8,000-song catalog that includes Ricky Martin’s “Livin’ La Vida Loca” and Sheryl Crow’s “All I Wanna Do.” The seller was the investment arm of Minneapolis-based grain processor Cargill Inc.
“Our goal is to create a sizable new entrant in the music- publishing business over the next five years,” Philipp Freise, a KKR director responsible for European media investments, said in an interview. “We will compete against the incumbents.” Jackson’s death has spurred interest in his stake in Sony/ATV Music Publishing, according to Rob Wiesenthal, chief financial officer of the Tokyo-based Sony’s US unit.
“They’re inquiring,” Wiesenthal said in a July 22 interview. “But it’s not for sale.”
The late singer began building his portfolio in 1985 with the $47.5 million purchase of Beatles tracks. His half stake in Sony/ATV is worth at least $750 million, Billboard said. The estate also controls MiJac Publishing, comprising much of Jackson’s solo work.
EMI’s publishing would attract investors if it became available, said Steve Gordon, an industry attorney in New York.
The label’s owner, London-based Terra Firma Capital Partners Ltd, is seeking to refinance loans used to fund the 2007 purchase of the company, the Financial Times reported July 17. Andrew Dowler, a Terra Firma spokesman, declined to comment.
Publishing can produce cash returns of 20 per cent a year or more, said Lawrence Mestel, chief executive of Primary Wave, the Credit Suisse-backed publisher.
New York-based Primary Wave, which holds rights to songs by Nirvana’s Kurt Cobain and Aerosmith’s Steven Tyler, has marketed Cobain’s songs to shoemaker Converse Inc and Aerosmith’s to lottery company GTECH Holdings Corp., Mestel said.
Frankenheimer, who has represented ABP and Bertelsmann, said a payback of 7 per cent to 12 per cent is conservative for a “high quality and properly managed” catalogue.
In the biggest deal to date, Vivendi SA’s Universal Music Group paid $2.1 billion for Bertelsmann BMG’s catalogue in 2006, when the German company was selling assets to repay debt from share repurchases, according to spokesman Tobias Riepe. The catalogue includes songs from Coldplay and Barry Manilow.
The Dutch pension ABP, which oversees retirement assets of about 2.7 million government employees, outbid established publishers in April for the works of Richard Rodgers and Oscar Hammerstein II, including “The Sound of Music” and “Oklahoma!”
The songs are managed by ABP’s Imagem Music Group, which has revenue exceeding ¤100 million and rights to more than 200,000 pieces of music. Those include Jackson’s “You Are Not Alone.”
Revenue from Jackson songs like “Thriller” and “Billie Jean” will set “royalty history,” according to the UK collection agency PRS for Music.
“For tragic or joyful reasons, in this case tragic, songs can do well,” said Ronald Wuijster, a managing director of APG Asset Management, which runs the pension’s portfolio. “You take that into account, this is the reason we invest in these rights. Music is so important it will always be used.”
