Warner Music Group’s IPO, delayed by the coronavirus pandemic and overshadowed by nationwide protests, made a big splash on the Nasdaq stock exchange on Wednesday, rising over 20% from the IPO price and giving music a brief spotlight on Wall Street.
Warner’s owner, Access Industries, floated 70 million of 510 million shares outstanding at $25 per share. After being delayed by a market crash caused by the coronavirus pandemic, Warner had an excellent debut: Its shares opened at $27 and rose to $30.85 before closing at $30.12, up 20.5%. Day two is shaping up as well, with shares rising another 5% to $31.80 by early afternoon.
Opinions of the IPO will depend on the vantage point. A music company’s debut on a stock exchange is a momentous event that puts the music business on Wall Street’s centerstage. In this case, investors that want to capitalize on the rise of streaming entertainment have an additional place to park their money.
But does Warner’s IPO actually change anything? Does it provide stakeholders — especially performing artists and songwriters — more visibility into the company’s inner workings? Does it affect how the company spends and invests? Will it impact the composition of the board of directors?
Here’s Why Warner Music Group’s IPO Matters:
1) Investors gave a big note of confidence to record labels and music publishers. Warner opened at $27 on the Nasdaq on Tuesday, valuing the company at $16.27 billion with a healthy 21.5 times EBITDA multiple. (Over the last 12 months, the average Nasdaq stock had an average EV-to-EBITDA multiple of 17.0.) Of course, the stock market is not the economy, as the saying goes. But a company’s share price is an accurate indication of the market’s belief in a company’s future financial performance and the health of its market. Today, record labels and publishers are far more valuable than when the music industry cratered in the ‘00s. Access Industries paid just $3.3 billion for Warner in 2011 and earned a 18.5% compound annual growth rate on its investment.
2) Investors get to participate in the music industry through a pure-play music company. Investors seeking to capitalize on the rise of streaming entertainment have only had a few pure-play options, such as Netflix and Roku, which live exclusively in that space. But they have not had a clean route into the music business until Tuesday’s IPO because Vivendi, Sony Corp. and Bertelsmann have diversified businesses beyond record labels and music publishers. Until Tuesday’s IPO, only Warner’s bond holders have been able to invest in a pure-play.
3) Warner’s share price is a benchmark, and possibly encouragement, for future music company IPOs. Vivendi sold 10% of Universal Music Group in December at 24.9 times calendar year 2019 EBITDA and plans to float UMG in 2023. Warner’s multiple — wherever it stands in three years — will be a comparable point of reference when calculating a proper value for UMG.
And Here’s Why It Doesn’t:
1) The IPO doesn’t improve Warner’s liquidity at a time of unparalleled economic upheaval. Warner won’t receive proceeds from the IPO or later offerings; Access Industries is selling shares from its 100% ownership. Now, Warner has a financial buffer with $300 million of untapped credit and $484 million of cash and cash equivalents. With label and publishing revenue the safest revenue streams in the music industry in 2020, Warner is safer than companies like promoters and agencies that rely on live events. With concerts on hold, artists, agents and managers are bringing in less money and must dip into savings or tap a line of credit (if possible) to survive. In contrast, record labels and publishers are less exposed to restrictions on large public gatherings. People will pay for music, radio will play music and companies will license music for use in commercials, movies, television and the like (although rights owners will feel the pinch of contracting advertising budgets).
Nevertheless, given the uncertainty that grips all facets of the economy, what company would pass up adding to a financial cushion without the obligations (interest, repayment) of debt?
2) Access Industries retained nearly all shares and votes. Access gave up little in return for about $200 million raised by the IPO. Access sold 70 million shares of Class A common shares and kept 400 million shares of Class B common shares, giving it 86.3% equity ownership and 99.2% of combined voting power, according to Warner’s S-1 filing. The dual-class structure gives Class A shareholders “limited or no ability to influence corporate matters” while “concentrating voting control with Access for the foreseeable future,” Warner’s filing explains. Investors that are bullish on the music industry must be willing to trade Warner’s growth potential for a lack of control typically afforded to shareholders.
3) The IPO did not shed new light onto Warner’s financials. Although Warner had not been a publicly traded company, it released audited, quarterly financial statements to provide to debt holders. Typically, an IPO provides the public with financial statements that offer a better understanding of a company’s operations and obligations. IPO filings from Spotify and Deezer afforded a deep look into the finances of money-losing music streaming services — with different results. Spotify went ahead with its IPO; Deezer pulled out. If UMG has an IPO in 2023 (as currently planned), it will provide financial statements with the same detail Warner has provided since it was purchased by Access in 2013.
