The French financial markets authority AMF has said that Warner Music cannot be locked out of making a bid to buy Believe, and that the Denis Ladegaillerie-led consortium’s proposal to waive a board condition to accelerate their acquisition of the company is “not compliant” with takeover regulations in France.

As a result, Believe has granted Warner access to its data room to give it an equivalent level of data “consistent with the information provided to the consortium” subject to confidentiality agreements. Believe’s share price was up around 6.8% after the news.

Believe’s board has now told Warner to submit a binding, unconditional and fully financed offer for Believe no later than 7 Apr. “Fully financed” in this context means that if Warner requires any financing to do the deal, it needs to have that finance lined up before submitting its bid - it can’t say “We are going to offer this amount of money, but need to arrange financing to be able to proceed”. 

Effectively, this is like making an offer to buy a house or flat and unless the seller knows you can pay cash, or already have your mortgage offer lined up, they’re not going to accept your offer. Based on analysis of recent filings by both Warner and Believe, it’s unlikely that Warner has all the cash it would need to be able to proceed. 

Warner has previously made an informal proposal to buy the company at €17 a share. With 97,089,850 shares in Believe that €17 a share offer would mean Warner needs €1,650,680,450 to buy 100% of the share capital of the company. Translated into dollars at today’s current rate of €1 = $1.0831687 this means $1,787,965,397 - $1788 million or nearly $1.79 billion.

If Warner - after access to the confidential data - decided to refine its bid and go higher or lower, that figure would change.

So what could a Warner offer look like and can it actually come up with the cash in fourteen days? Here’s what we already know.

In its last quarterly filings, Warner told us that it had $641 million in cash and cash equivalents on hand. Last quarter the company also had free cash flow of $264 million, giving it total immediate liquidity of $905 million. Warner has access to a $350 million revolving credit facility, which - assuming this is not already committed - raises its potential funding pool to $1255 million. This leaves a significant gap between the acquisition price of $1788 million - a shortfall of $533 million.

However, if we turn to Believe’s recent filings, we also know that it has cash and equivalents of €214 million, which converted to dollars is just short of $232 million. This cash would pass to Warner on acquisition, meaning that the net cost to Warner would fall to $1556 million - a shortfall of $301 million. That’s still a substantial shortfall, though, and one which Warner would need to be able to cover before submitting its bid. If Warner was to increase its bid to €19.50 - the price per share at Believe’s IPO - then these numbers change significantly. 

So, at €17 a share, Warner is $301 million short on the deal - and at €19.50 a share, that looks more like a $654 million shortfall. Either way, the deal would likely wipe out Warner’s current cash reserves and require the company to take on additional debt to finance the acquisition. 

Warner recently renegotiated terms on some of its debt, extending the term, suggesting that lenders regard the company as a solid prospect. While the combined value of Warner and Believe is likely to be higher than the individual values of each company - which may have a favourable impact on Warner’s debt ratio, meaning easier access to finance at better rates - Warner already has substantial debt, and a Believe acquisition may hamper its ability to make further acquisitions in the short term. 

The added complexity is that it’s not as simple as buying up the shares listed on the stock market. That only represents a small portion of Believe’s total equity, the majority of which is held by long term institutional investors and Believe CEO and founder Denis Ladegaillerie. 

For a deal to proceed Ladegaillerie doesn’t necessarily need to sell his shares to Warner, but it’s unlikely that Warner would want to proceed with a hostile takeover that doesn’t bring the founder and CEO along with the company. The main obstacle to Warner’s takeover remains the long term institutional investors who have teamed up with Ladegaillerie as part of his consortium. As we previously discussed, are they likely to switch sides for a quick €2 per share? It seems unlikely.

There’s also another obstacle - the French financial markets authority, or AMF. While the most recent AMF ruling serves Warner’s interests by putting the brakes on the consortium’s accelerated process and allowing the major access to the data that it needs to be able to make a proper offer, there’s a bigger AMF question on the horizon. Would AMF even allow Warner to acquire Believe? 

Warner Music is majority owned and controlled by Access Industries, the privately held global investment company founded and owned by Ukrainian-born industrialist and investor Len Blavatnik. Access bought Warner in May 2011, when it was a NYSE-listed company, fending off interest from a wide range of other competing bidders. Access also has majority interest in French music streaming platform Deezer. 

An analysis of Believe’s recent FY23 financials by CMU shows that Believe was paid €71.37 million by Deezer in 2023. Deezer made €484.7 million in revenue in 2023, which means it likely paid out somewhere in the region of €252 million to sound recording rightsholders. This means that it paid out around 28% of its entire sound recordings royalty pool to Believe. 

Conversely, further analysis suggests that a very significant chunk of Believe’s France-derived digital revenues - and possibly approaching 50% of digital revenues for Believe France - come via Deezer. 

On that basis, it’s likely that any deal that brings Believe into common ownership with Warner and Deezer is something that the AMF might scrutinise very closely indeed. 

And that’s before you consider the likely “synergies” and “operational efficiencies” or “reallocation of resources” that are normally associated with M&A activity - a euphemism for “reduction in combined headcount”. Throw in the fact that WMG recently laid off a significant chunk of its workforce, and that many of those laid off worked for previous acquisition targets, and suddenly whatever the potential upsides of a WMG x Believe merger might look like to investors it is not such a rosy picture if you are the AMF. 

This would also represent a significant European operator falling under US control, and a further shift in the balance of power in the music business from Europe to the US. It’s not inconceivable that this may even attract interest from European Union regulators. 

Warner’s attempt to buy EMI in 2000 was blocked outright by European regulators, and its acquisition of Parlophone in 2013 was also subject to investigation by the European Commission. Of course the landscape today is very different, but with that changed landscape there is an argument that a strong non-major pan-European operator like Believe is more important than ever from a regulatory standpoint. 

And while Warner is smaller than both Sony Music and Universal Music, the acquisition of Believe by the smaller of the majors would increase its market share and power, potentially in itself causing an imbalance in the market, quite apart from the local French considerations. 

However, both Universal and Sony have made similar acquisitions of artist and label services businesses over the years including UMG’s Ingrooves and mtheory acquisitions, and Sony buying The Orchard and AWAL. Of course, the AWAL deal was scrutinised by the UK competition regulator, but was ultimately approved. 

We’ll know more in a couple of weeks if and when Warner proceeds with a formal, unconditional and fully financed offer - but it's unlikely that any such offer will be an open-and-closed deal. If you add in a potentially drawn-out regulatory investigation into that deal, prompted by the potential market distortion - unintentional or otherwise - that might be precipitated by WMG, Deezer and Believe being under common ownership, then suddenly Warner’s extra €2 a share might seem even less attractive to the consortium partners backing Ladegaillerie. 

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