Music's Silver Lining: Publishing

With music sales still falling, dragging with them the valuations of media and entertainment companies, music publishing has emerged as an attractive alternative area for investment in the music industry. But what's more notable, according to some involved in music publishing, is how, for the first time, it's attracting Wall Street players.
"It's always been a healthy business," Lionel Conway, president of Los Angeles? based Mosaic Music Publishing, says of the field. Publishing companies collect a variety of royalty revenues, including mechanical (from music sales), performance (from radio play and live performance) and synchronization (from the use of music in film, television and advertising). In general, that makes publishing companies less susceptible to the swings experienced by record labels, whose revenues rise and fall according to how their albums are selling. Says Conway, "Publishing doesn't suffer the way music companies do."
The result? "It's remarkable to observe that, with only momentary exception, it has been a steady march forward," in terms of the growth of revenues and valuations of music publishers, says John T. Frankenheimer, co-chairman of law firm Loeb & Loeb. Frankenheimer has experience in transactions involving music-publishing assets, including the largest one this year: Gaylord Entertainment's sale of Acuff-Rose Music Publishing to Sony/ATV Music Publishing for $157 million in cash.
EMI Music Publishing, the largest, accounted for 57% of parent EMI Group's total operating profit in the fiscal year ended March 31, 2002, despite contributing just 17% of total revenues. Analysts at Bear Stearns in London noted in a recent research report that the publishing unit's 26% operating margins "were nearly three times the level of" EMI Recorded Music. "The superior operating performance is due to the low capital requirements, coupled with the absence of funding music releases with their high distribution and production costs, which are all associated with music recording."

OVERSHADOWED ASSETS
Four years ago, EMI Music Publishing's revenues were #298 million ($467 million), and its operating profits were #89.7 million ($141 million). With the exception of a 3% decrease in operating profits three years ago, EMI Music Publishing has showed growth in both categories every year since, with revenues of #416.4 million ($653 million) and operating profit of #107.9 million ($169 million) in the latest fiscal year.
This has come despite a decline in music sales in recent years, as EMI Music Publishing's sales mix indicates. According to Bear Stearns, mechanical revenues accounted for 62% of the division's revenues four years ago but 55% in the latest fiscal year. Over that same period, performance revenues rose from 21% of the total to 24%, while synchronization revenues rose from 9% to 13%. (Other revenues held steady at 8%.)
Some suggest that the decline in music sales had been overshadowing the value of music-publishing assets. Last December, at UBS Warburg's Media Week conference in New York, EMI Group chairman Eric Nicoli told a crowd of investors that EMI Music Publishing's 600-plus employees delivered nearly a third of EMI Group's operating profit. Yet, since last December, as the fall-off in music sales have dominated the headlines, EMI's share price has declined about 50%. Says one person familiar with the market, "Music publishing was the baby that was getting thrown out with the bathwater."
Now, people are paying attention to music-publishing assets--and paying money for them. Music-publishing companies are now being more widely recognized as assets that, like film libraries, deliver consistent, predictable returns. For companies that are already exposed to the music market, such as Sony, music-publishing assets lend a valuable, steady revenue stream.
Yet, according to Frankenheimer, there are now also Wall Street buyers--major investment banks, buyout firms, insurance companies and pension funds--that weren't in the market at all five years ago. The reason, he says, is that music-publishing assets have shown themselves to be relatively recession-proof, delivering stable, predictable returns. Given current volatility in the financial markets, music publishing has become "a very appealing investment for professionals."

HIGH PRICES
In response to this outside interest, Frankenheimer says the major record labels--all of which have substantial publishing operations--have redoubled their efforts to retain their share of the music-publishing market, which has driven up prices.
"Prices are extremely high right now," says Ron Kenan, president of Saban Music Group, which was formed after entrepreneur Haim Saban sold his half of the Fox Family Worldwide TV network to Walt Disney Co. for $1.5 billion last year. Los Angeles? based Saban has earmarked $250 million for music acquisitions, including publishing assets, independent record labels, distribution companies and artist-management and booking firms. The firm, which bid on Acuff-Rose, has yet to make any music-publishing buys.
"Multiples are still going up," says Mosaic's Conway, referring to the way a publishing company is valued by applying a multiple to its net publisher's share. Conway says it's not unusual to see a multiple of 20 applied to a catalog for sale. "It wasn't so long ago that you would use a five multiple."
Adds Kenan, "You have to be careful of not paying too high a multiple for a catalog that's in its peak years."
Mosaic Music Publishing is part of Mosaic Media Group (MMG). Formed in 1999, it also includes Atlas Entertainment, Gold-Miller Management and Atlas-Third Rail Management. So far in 2002, MMP has purchased the Hamstein Music catalog, which includes material by ZZ Top and others, and 50% of a 53-song Aerosmith catalog. It currently has about 8,000 copyrights in all.
"There are quite a few interesting smaller catalogs out there that we're considering," says Conway, who has also served as president of Madonna's publishing company, Maverick Music, and as president of Island Records. "If we feel like they're underlicensed, that's what's of interest to us." Of growing importance are such ancillary royalty sources as video games, mobile ring tones, karaoke, emerging international markets and educational CD-ROMs.
And, while the Internet has clearly created more opportunities for collecting royalties on catalogs, Kenan says they have for the most part yet to be realized. For example, mechanisms for collecting royalties on new-media uses have to mature, he says. Today, "There seem to be more avenues," he concludes. "But not all of the avenues have matured as sources of revenue--new media, in particular."