2023-03-17 10:30:00 ET
Summary
- The value of the recordings that WMG has the rights to could be pretty high considering multiples we've been recently seeing in the music industry.
- Publishing catalogues are typically valued on the basis of a price on net publisher's share, which is license revenue net of artist royalty payments.
- Catalogues are more valuable the more they generate longer-term revenue and the higher proportion of the revenue that comes from streaming.
- Currently, WMG is valued at around 8x on net publisher's share, as far as we calculate it, where it could be valued at 12x, which would be the October 2021 share price.
- It could be higher, but realistically as artists get more established, WMG will own less of the good stuff. But the early recordings of those artists should still be theirs.
Published on the Value Lab 03/11/23
Warner Music Group ( WMG ) is a music publishing business that most would have heard of. Their model is to scout artists, negotiate a royalty rate, and then take care of all the marketing and promotion of the artist's recorded pieces. In general, WMG will own the recordings but not usually the compositions, to which the artists have the rights, but they might also own that depending on what deal was struck, or acquisitions that might have happened at a later date where WMG might buy a share in those rights too. WMG may also have rights in the touring revenue or other non-recorded commercial activities that the artists might benefit from, like merchandising. Because of financial sponsors getting into the music space, there are precedents to put a higher multiple on WMG, and we think the much higher October 2021 share price was a more justifiable one considering these multiples. However, the higher rate environment is a consideration.
Making the Case
Multiples in the industry are usually made on net publisher's revenue when valuing the recordings. Net publisher's revenue is what the publisher makes, like WMG, net of royalties to the artists. There have been lots of deals in the space that give some multiples. Bob Dylan , Justin Bieber, Stevie Nicks and Michael Jackson's estate are some of the people and entities that have been monetising these properties in music megadeals. Financial sponsors are being backed by companies like Blackstone ( BX ) who are looking to find new areas to make money, and royalties in a pretty complex industry is definitely one place. Hipgnosis ( OTCPK:HPGSF ) was the one that acquired JB's rights to his own music, which included a partial interest in the publishing rights, usually held more by the record companies, but also in his own compositions. Revenues that would have been entitled to him for the streaming of his music will now be going to Hipgnosis, and Universal Music Group ( OTCPK:UMGNF ) will continue to administer the catalogue to monetise it. UMG also owns parts of the master recordings too, and in this case they own it in perpetuity, which gives a clue of the sort of value that might be encased in the balance sheets of record companies like WMG as well.
As artists become more established, they own more of what they make, and this is why JB had so much to sell. Still, the record companies will have important shares especially in earlier albums produced with the artist. As much as UMG, WMG has a pretty great lineup of artists that it records through its several record labels, including Dua Lipa, Lizzo, Stone Temple Pilots and a whole lot of others .
It's hard to estimate exactly what would be the net publisher's revenue for WMG. They are exploiting the recordings that artists have made with them, so, and they pay artists out of gross profit. Some of the COGS is associated with recording costs and advances in the periods, that are of course non-recurring with respect to their property once it's created, but the gross profit is a good rough figure to use since it will include the royalties being paid, which do go from around 10-50% depending on the artist's bargaining power. GM is around 50% which lines up somewhat with royalty averages, and not all the revenue should be included. Expanded-rights revenues are typically from short term service-based contracts, so we take those out. Also, things related to performances. So the multiple on net publisher's share is probably something closer to 8.4x.
Bottom Line
It's tough to know exactly what they own of each artist's catalogue, but ignoring some of the service oriented revenue completely, WMG seems to be valued at around 8.4x on the share of income coming from its most monetisable assets. We've tried to be conservative by extending the scope of costs deducted from net publisher's rights.
A more normal multiple for catalogues that have staying power and generate income from longer-term digital sources would be around 12x. For the really classic catalogues, towards 20x easily , but 12x is a good average considering some of the popular stuff today may not have the staying power to justify very high multiples. At a 12x multiple, the share price that would make sense for WMG is something closer to where it was in October 2021, more or less 50% higher than where it is today. This is a little optimistic considering the market situation, but it is something to consider.
We should stress that not every artist is Bob Dylan or Bruce Springsteen, but you get the idea - there should be some hidden value in these record labels, considering that a burgeoning financial sponsor business is forming around these types of assets. Revenue streams from newer artists likely need to mature in order to have proven value for leveraged acquisition, especially as rates come up - and the higher rate situation is a critical element for assessing sectors on the basis of their appeal to sponsors. But value should accrete in a company like this. Prospective shareholders should take this into account.
For further details see:
Warner Music Group Could Be Pretty Undervalued Considering Its Catalogue