There’s nothing like a high stakes boardroom battle to liven things up - and in a (sort of, but not really) surprise announcement today, Warner Music Group has really delivered the goods. It wants to buy Believe in a deal that would wipe out Warner’s cash reserves while attempting to outbid Believe founder and CEO Denis Ladegaillerie’s own offer to buy out shareholders and take the company private.
A month ago independent distributor and artist services business Believe - currently listed on the Paris stock exchange - said it was going to go private in a deal led by Ladegaillerie. This would see the company delist from the stock market and existing shareholders get a huge premium for their shares.
A consortium of investors led by Ladegaillerie has offered €15 per share - more than 50% higher than the previous 120-day average share price. Everything looked rosy - until Warner Music Group popped up with a higher offer, sending the share price soaring. But can WMG afford to buy Believe - and would Believe shareholders sell to the major?
In a statement released by WMG today, the mini-major positions its offer as being better than “the purely financial transaction” proposed by Ladegaillerie, because WMG could offer Believe “strategic support and financial stability” as well as “accelerating its expansion into new geographies”. The combination of WMG and Believe, says WMG, would be “beneficial” to both Believe and the “shareholders, employees, artists and labels” associated with Believe.
WMG would, says the statement, be happy to pay cash - and an additional premium over what Ladegaillerie and his consortium were offering - with Warner proposing €17 a share.
As the markets opened in Paris, Believe’s share price leapt up from yesterday’s close of €15.60 to peak at €16.70 before dropping back slightly. At time of publication the share price is €16.30, up just over 5% from yesterday’s close.
It’s not a huge surprise that Warner might be interested in buying Believe. When Believe listed back in June 2021 its value was €1.9 billion. Since then the share price has underperformed due to a combination of macroeconomic factors and the Paris Euronext market arguably not understanding Believe’s true value.
Despite the poor share price, Believe’s revenues have shown significant - and sustained - growth, increasing 29.9% in 2021 and 32.3% in 2022. By these metrics, the true value of Believe today may be well in excess of its publicly traded value - and, indeed, this seems the motivation for the bid by Ladegaillerie to take the company private.
With barely any debt and significant cash reserves, Believe seems well placed to benefit from going private - a move which would allow it to raise money to expand much more easily than it can as a publicly traded company.
So “financial stability” doesn’t seem particularly high up the list of possible concerns for Believe, its employees, shareholders, and artist and label clients.
Warner has the cash - just - to be able to afford to pay €17 a share to acquire Believe. In its last filings WMG reported $754 million in cash and equivalents, $1195 million in accounts receivable - a total of $1949 million - and other current assets of $667 million, a total of $2.6 billion in liquid assets.
However, WMG also has significant debt - with more than $4 billion in long term debt financing.
So, while Warner could find the necessary cash - €1.65 billion, or nearly $1.8 billion - this would wipe out the mini-major’s cash reserves, potentially placing it more at the whim of unpredictable events, and potentially blocking its ability to make further big deals without taking on more debt.
It would also fold Believe into a company with significant debt - and potentially see Believe revenues used to service that debt.
Debt isn’t necessarily a negative thing, and so long as a company can grow its revenues and income to service any debt it can be a huge lever that facilitates significant growth and expansion.
The question, then, is whether Believe would rather strike out on its own and raise debt to grow, or jump into bed with Warner.
The advantages for Warner are clear - and, actually, very little to do with money. But they’re also not really that much to do with benefits for shareholders, employees, artists and labels. Instead, acquiring Believe would catapult WMG onto a much more level playing field with the other two major music companies, Universal Music and Sony Music.
The acquisition would not only add potentially $1 billion a year in revenue, but would also significantly increase WMG’s market share - the critical factor when it comes to streaming income.
WMG CEO Robert Kyncl has repeatedly highlighted what he sees as a key benefit of major labels, saying “the role of large music companies is growing exponentially” because WMG’s “ability to aggregate large volumes of rights” benefits artists and songwriters - something that, he says, is particularly important “when dealing with complex existing and new distributors and technologies”.
The acquisition of Believe would also more than make up for BMG pulling the plug on its deal with WMG’s ADA distribution division, a move which sees more than 80 billion streams shift away from WMG.
A big part of Kyncl’s mission since he took over as CEO at Warner has been to reposition the company as a force to be reckoned with, undertaking a significant internal reconfiguration in a plan that will help the company “free up more funds to invest in music and accelerate our growth for the next decade”.
Part of that reconfiguration has included a significant programme of lay-offs which will see WMG reduce headcount by approximately 10% - “600 people” says Kyncl.
With many Believe employees having worked at the company for significant periods of time, WMG’s position that an acquisition of Believe would benefit employees may ring a little hollow for Believe staff members who may feel nervous that any merger would - inevitably - involve a reduction of headcount, with many functions and departments duplicated across the two companies.
The statement from WMG is couched in caution, making clear that any approach to Believe was made on “a confidential, exploratory and non-binding basis and that WMG has requested access to a limited list of key due diligence information with a view to possibly submitting a formal offer relating to the transaction”.
It goes on to say that recent actions by Ladegaillerie’s consortium - which seem to have accelerated the move to private ownership - may “violate” a number of French securities regulations.
However, all of this may be largely theoretical posturing by Warner - with more than 70% of the shares and over three quarters of the “theoretical voting rights” of Believe already under the control of Ladegaillerie’s consortium, it’s not even clear if Warner would be able to acquire the company.
Any offer it makes would require the approval of that consortium, of which Ladegaillerie is a key participant, both in terms of shares and voting rights, but also as the founder and existing CEO of the company. The other consortium partners are long-term investors in Believe, and so it seems unlikely that they would ditch their bid for a quick profit when the long term upside of Believe going private is potentially far, far higher.
Cynics might say that, with such a non-binding, non-committal offer based only on limited information, Warner may not actually be serious about buying Believe at all.
Maybe it simply wants to tie Believe up in a boardroom battle that distracts focus from its wider business, and increases the price that it costs the consortium to take the company private - giving WMG an opportunity to move on other deals where it may be competing with Believe, and making Believe’s future gearing less favourable as it goes forward.
A previous unsubstantiated and incorrect rumour that circulated several years ago suggested that Sony may have been about to buy Believe. That rumour - according to sources at the time - caused concern amongst a number of Believe’s label clients, and a certain amount of firefighting within Believe.
Whatever the reality of the situation, the Ladegaillerie-led Believe deal - which seemed like a certainty when it was announced - now seems less straightforward.
However, CMU’s previous analysis of that deal showed that the price offered by Ladegaillerie - while fair and great value for shareholders - was potentially also great value for the consortium, with significant value that could be unlocked once the company was private.
On that basis it would not be a surprise if the consortium increased its offer to shareholders in an attempt to price Warner out of the deal.
Can Warner go higher? Almost certainly. Can Warner go high enough to lock out the existing consortium? On its current position and without taking on further debt - or without doing a cash/equity transaction - maybe not. Would Believe’s current investors benefit from a cash/equity transaction? That depends whether you think Believe as part of Warner as a publicly listed company is better than Believe on its own as a private company.
