EDGAR SPEAKS…VERY CAREFULLY

Speculation of another move on EMI by Warner Music has further ramped up, thanks to an interview with Edgar Bronfman Jr. in the Financial Times.

The story began by noting that Bronfman and his backers had already extracted 140% of their $2.6 billion investment by the time of WMG’s IPO in 2005, allowing them to be “patient and thoughtful,” Bronfman told Andrew Edgecliffe-Johnson. The unspoken contrast is with Terra Firma, which bought EMI as credit markets froze, leaving bankers unable to sell on the debt and investors facing writedowns, noted the reporter.

WMG’s recent $1.1 billion bond issue is one factor in the renewed speculation about a deal. “It was a real vote of confidence,” said Bronfman. “We now have no [debt] maturities for five years, and frankly more flexibility in how we operate the company.” Asked whether another run at EMI would make sense, Bronfman said that there is still “a fundamental rationale for scale” in the industry. “Let’s see what the future holds. We probably should just leave the subject.”

But prodded further by the interviewer, Bronfman carefully added: “We’d like to achieve a happy medium where the bond market doesn’t feel we’re going to go crazy with acquisitions, which we certainly won’t, but the company has the flexibility to do acquisitions which are attractive for both equity and debt holders.”

The Bronfman family’s decision to move from New York to London adds fuel to rumors that the acquisitive mogul’s decade-long dance with EMI may not be over. With their oldest son heading for high school in two years, “we thought if we’re ever going to do this, it’s kind of now or never,” he explained. “It should be a seamless situation here at the company and a wonderful thing for my family.”

Bronfman stressed that he’ll spend half his time in New York, and says his closer oversight of an international business that has never matched Warner’s clout in the U.S. should accelerate its growth. “We think we’ve got a pretty bright future as digital penetrates further around the world,” he said, adding that he believes a turnaround for the music business is “inevitable.”

Bronfman insisted that WMG embraced digital distribution “earlier, harder and faster” than the rest of the Big Four, making Atlantic the first U.S. label to generate more than half its revenues from online and mobile. Warner’s early willingness to work with scores of start-ups, however, was followed by a round of writedowns on its digital investments, and Bronfman said the company has become “more selective” about digital partners.

He further claimed that his team has signed half of Warner’s active artists to 360 deals, where it can earn lucrative publishing, touring and merchandising revenues. “Fundamentally, we are the risk capital,” he said. “We’re prepared to take the capital risk on a new artist, and we’re building a company so that we can exploit on behalf of the artist all the revenue streams that are made possible by that initial investment.”

For artists, making the breakthrough to stardom is getting harder, he argues, and organisations such as his “cannot easily be replaced”.

Asked about the slashing of A&R budgets, Bronfman said that “we’ve gained marketshare because we focused the A&R budget on the artists we believed in.”

And as for his private equity backers’ chances of raking in even more billions, Bronfman claims WMG has proved that music “is a business that’s capable of producing very real cash flow.” But he doesn’t claim to know exactly where that cash flow will ultimately come from: “I don’t think we or anyone else can say: ‘This is our new model, and this is how it’s going to look five years from now.’”