The valuation of the label – closely controlled by the underworld billionaire Len Blavatnik – has stagnated since its IPO in the summer of 2020.
Blavatnik still got a good deal. He bought Warner Music in 2011 for $3.3 billion, at a time when everyone thought the label business was on the verge of extinction — record sales had collapsed and piracy was still in its heyday.
The streaming bonanza has shaken up the landscape and offered new opportunities to labels. Goldman Sachs promoted the Warner Music IPO by assuring that their market would double again in ten years. Halfway through this journey, events have so far not proven him wrong.
Neither do Warner Music's accounts, as evidenced by its turnover which doubles between 2014 and 2024, while its profit almost quadrupled over the period. But investors are anticipating the next blow. Surprisingly gullible with certain sectors, they are inclined to play defensive here.
It is true that the race to acquire musical rights resembles a speculative mania. In 2021, when catalogs of titles were trading at more than twenty times their sales, Warner Music CEO Steve Cooper warned that these transactions “defied all financial logic“, and likened the bidding wars to the Yukon gold rush.
The three heavyweights in the sector – Warner, Universal and Sony – then saw very aggressive private equity funds landed on their territory sponsored by KKR, Blackrock and Apollo, among others. Subsequently, Cooper was fired and replaced as head of Warner by Robert Kyncl, a veteran of Netflix and YouTube — which says a lot about the direction of the labels' strategy.
Zonebourse has long anticipated a hangover in the sector. We will remember in this regard that, this summer, the general manager of Universal urged investors to excuse a decline in streaming revenues in order to focus on the “long term”.
Furthermore, earlier this year, KKR left the table by selling Chord to Universal. For the New York firm, it was a great exit at the highest level, and many investors interpreted it as a signal of reversal.
The valuations of Warner and Universal clearly illustrate the paradigm shift. The first trades at x13 its expected EBITDA over the next twelve months, against x16 its EBITDA achieved over the last twelve months. The second still commands a net premium, at x16 its expected EBITDA over the next twelve months, compared to x25 that achieved over the last twelve months.
As it stands, the best way to capitalize on the boundless growth of streaming was still to invest in Netflix or Spotify – that is to say on the distribution side – rather than in the labels.
