Warner Music Prices IPO at $25 Per Share, Valuing Company at $12.75 Billion

Ed Sheeran - The BRIT Awards Show Performance - Getty - H 2018
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Management of the music major is "indicating a significant positive inflection in margins," says one analyst, but "the majority of investors we speak with are skeptical."

Warner Music Group on Wednesday priced its much-anticipated initial public offering at $25 per share, at the higher end of the $23-$26 range and valuing the company at $12.75 billion.

Its stock in early trading went as high as $28.97 after opening up 8 percent at $27. As of 12:05 p.m., the stock was up 15.4 percent at $28.85.

The music major's shares started trading on Nasdaq under ticker symbol "WMG," kicking off the biggest U.S. IPO week of the year after a quiet time due to the novel coronavirus pandemic and the recession it is expected to cause.

The stock had been expected to price on Tuesday, but the company delayed that to Wednesday to support music industry initiative Blackout Tuesday to show support for Black Lives Matter.

The IPO priced 77 million shares of Class A common stock, up from 70 million originally planned. That raised more than $1.9 million for shareholders, up from the original target of as much as $1.8 billion. The company will have 510 million shares outstanding after the IPO, valuing it at $12.75 billion.

Warner Music, owned by Len Blavatnik's Access Industries, had filed for its IPO in February, with Morgan Stanley, Credit Suisse and Goldman Sachs acting as the joint lead underwriters.

Longtime music industry analyst Mark Mulligan at MIDiA Research argued in a report at the time, before the pandemic hit, that it was a "good time" for Warner Music's IPO. "The music rights M&A market has until now been constrained by supply," he wrote. "Now, large institutional investors have another way in which they can place bets in the burgeoning recorded and music publishing businesses." The arrival of the coronavirus crisis in March led the music firm to delay the IPO. 

Mulligan told THR on Tuesday: "With what is going on in the U.S. right now, there may be more impactful dislocations to the U.S. economy than COVID. But assuming that does not get to the scale where it spooks the markets, we are entering a post-COVID phase. We may have a return of infection rates, but for now we are returning to some form of socioeconomic normality – a new normal for sure, but one in which business can be done. So from that perspective, there is good logic for why to IPO now."

Bernstein analyst Todd Juenger in a Tuesday report noted that his base case valuation scenario was for $12.7 billion. He also discussed various topics on investors minds, including music majors' competitive position compared with indies in the digital age. "One could make a strong argument that the independent labels are in a better position now than they ever have been, to compete with the majors (mostly because the huge physical distribution advantage held by the majors is no longer relevant)," he wrote. "One could hypothesize, therefore, the independents should be expected to offer richer deals to attract talent — potentially causing the majors to respond in kind."

Added the analyst: "For those who expect intensifying competition to attract and retain talent, that should be expected to drive higher rates of spending in artists & repertoire, marketing, and general & administrative. These items have, in fact, been growing faster than revenue for WMG for the past three years."

Juenger also highlighted that Warner Music management "seems to be indicating a significant positive inflection in margins," adding: "The majority of investors we speak with are skeptical."

Upon completion of the initial offering, Warner Music will have two types of common stock, Class A and Class B, the latter of which is held by Access Industries and will represent 99.2 percent of the total combined voting power of outstanding common stock following the offering. Because Access will control a majority of combined voting power, Warner Music said it will be a "controlled company" and may elect to not comply with certain governance standards under Nasdaq rules.

Warner Music's recorded music division generated $3.84 billion of revenue in fiscal year 2019, representing 86 percent of total revenue, according to a previous regulatory filing. The division is home to such artists as Ed Sheeran, Bruno Mars and Cardi B and includes storied labels like Atlantic, Elektra, and the recently rebranded Warner Records.

Its publishing arm, Warner Chappell Music, has a catalog of more than 1.4 million copyrights, including from songwriters Twenty One Pilots, Lizzo and Katy Perry. It generated $643 million of revenue in the latest fiscal year, or 14 percent of total revenue. The company also owns global music distribution firm Alternative Distribution Alliance, live music app Songkick, EMP Merchandising and Uproxx.

Blavatnik's Access Industries acquired the music giant in 2011 for $3.3 billion.