EMI’s on its knees, but is WMG in a position to help it back up?
The latest rumor is that Warner is positioning to acquire EMI’s recorded music catalog for $750 million, but Wall Street sources are having trouble making the math work. One particularly acute problem is a debt load of $1.945 billion, a figure one trader views as a stagnant bog. “I think it’s impossible for them to service this debt,” the New York-based portfolio manager told Digital Music News. “I don’t know how they do that, especially with the downward trajectory of revenues.”
Seems like a tough time to load up on more IOUs. Looking at the past five years, Warner revenues have dropped every year except for one, and the last seven quarters have been in the red. Leverage is one thing, but this seems like a near-impossible financial feat. “They can’t afford it,” another analyst opined. “It’s a fantastical idea.”
But it gets worse, because pessimism on the street is causing share prices to fall. That includes a recent downgrade by Standard & Poor’s, which dropped its rating to a “B+” level, or “four steps into junk” as described by the Wall Street Journal. The slumping profile dries another critical liquidity source, unless a far different acquisition price can be arranged.
The flip side? Other dealmakers are looking past the obvious fundamentals issue, and pointing to considerable investor cash on the sidelines. But how to get a reasonable return? In the wake of an EMI meltdown, banks are understandably cautious, though Bronfman and associates are never salesmen to be underestimated.