The Warner Music Group Is Sold at Auction

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question 78

Essay

The Warner Music Group is Sold at Auction


In selling a business, a firm may choose either to negotiate with a single potential buyer, to control the number of potential bidders, or to engage in a public auction.
The auction process often is viewed as the most effective way to get the highest price for a business to be sold; however, far from simple, an auction can be both a chaotic and a time-consuming procedure.
Auctions may be most suitable for businesses whose value is largely intangible or for “hard-to-value” businesses.
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In early 2011, the Warner Music Group (WMG), the third largest of the “big four” recorded-music companies, consisted of two separate businesses: one showing high growth potential and the other with declining revenues. Of WMG’s $3 billion in annual revenue, 82% came from sales of recorded music, with the remainder attributed to royalty payments for the use of music owned by the firm. Of the two, only recorded music has suffered revenue declines, due to piracy, aggressive pricing of online music sales, and the bankruptcy of many record retailers and wholesalers. In contrast, music publishing has grown as a result of diverse revenue streams from radio, television, advertising, and other sources. Music publishing also is benefiting from digital music downloads and the proliferation of cellphone ringtones.

In 2004, Warner Music’s parent at the time, Time Warner Inc., agreed to sell the business to a consortium led by THL Partners for $2.6 billion in cash. The group also included Edward Bronfman, Jr. (the Seagram’s heir, who also became the CEO of WMG), Bain Capital, and Providence Equity Partners. Having held the firm for seven years, a long time for private equity investors, its primary investors were seeking a way to cash out of the business, whose long-term fortunes appeared problematic. WMG’s investors were also in a race with Terra Firma Capital Partners, owner of the venerable British record company EMI, which was expected to take EMI public or to sell the business to a strategic buyer. WMG’s investors were concerned that, if EMI were to be sold before WMG, the firm’s exit strategy would be compromised, because there was much speculation that the only logical buyer for WMG was EMI.

By the end of January 2011, WMG had solicited about 70 potential bidders and attracted unsolicited indications of interest from at least 20 others. As this group winnowed through the auction’s three rounds, alliances among the bidders continually changed. In the ensuing auction, WMG’s stock price jumped by 75% from $4.72 per share on January 20 to $8.25 per share, for a total market value of $3.3 billion on May 6, 2011.

In view of the differences between these two businesses, WMG was open to selling the firm in total or in pieces, contributing to the extensive bidder interest. Risk takers were betting on an eventual recovery in recorded-music sales, while risk-averse investors were more likely to focus on music publishing. Prior to the auction, WMG distributed confidentiality agreements to 37 suitors, with 10 actually submitting a preliminary bid by the deadline of February 22, 2011. Of the preliminary bids, four were for the entire company, three for recorded music, and three for music publishing. For the entire firm, prices ranged from a low bid of $6 per share to a high bid of $8.25 per share. For recorded music, bids ranged from a low of $700 million to a high of $1.1 billion. Music publishing bids were almost twice that of recorded music, ranging from a low of $1.45 billion to a high of $2 billion.

For bidders, the objective is to make it to the next round in the auction; for sellers, the objective is less about prices offered during the initial round and more about determining who is committed to the process and who has the financial wherewithal to consummate the deal. According to the firm’s proxy pertaining to the sale, released on May 20, 2011, the subsequent bidding was characterized as a series of ever-changing alliances among bidders, with Access Industries submitting the winning bid. The sale appears to have been a success from the investors’ standpoint, with some speculating that THL alone earned an internal rate of return (including dividends) of 34%.



Motorola Bows to Activist Pressure
Under pressure from activist investor Carl Icahn, Motorola felt compelled to make a dramatic move before its May 2008 shareholders' meeting. Icahn had submitted a slate of four directors to replace those up for reelection and demanded that the wireless handset and network manufacturer take actions to improve profitability. Shares of Motorola, which had a market value of $22 billion, had fallen more than 60% since October 2006, making the firm’s board vulnerable in the proxy contest over director reelections.
Signaling its willingness to take dramatic action, Motorola announced on March 26, 2008, its intention to create two independent, publicly traded companies. The two new companies would consist of the firm's former Mobile Devices operation (including its Home Devices businesses consisting of modems and set-top boxes) and its Enterprise Mobility Solutions & Wireless Networks business. In addition to the planned spin-off, Motorola agreed to nominate two people supported by Carl Icahn to the firm’s board. Originally scheduled for 2009, the breakup was postponed due to the upheaval in the financial markets that year. The breakup would result in a tax-free distribution to Motorola's shareholders, with shareholders receiving shares of the two independent and publicly traded firms.
The Mobile Devices business designs, manufactures, and sells mobile handsets globally, and it has lost more than $5 billion during the last three years. The Enterprise Mobility Solutions & Wireless Networks business manufactures, designs, and services public safety radios, handheld scanners and telecommunications network gear for businesses and government agencies and generates nearly all of the Motorola’s current cash flow. This business also makes network equipment for wireless carriers such as Spring Nextel and Verizon Wireless.
By dividing the company in this manner, Motorola would separate its loss-generating Mobility Devices division from its other businesses. Although the third largest handset manufacturer globally, the handset business had been losing market share to Nokia and Samsung Electronics for years. Following the breakup, the Mobility Devices unit would be renamed Motorola Mobility, and the Enterprise Mobility Solutions & Networks operation would be called Motorola Solutions.
Motorola’s board is seeking to ensure the financial viability of Motorola Mobility by eliminating its outstanding debt and through a cash infusion. To do so, Motorola intends to buy back nearly all of its outstanding $3.9 billion debt and to transfer as much as $4 billion in cash to Motorola Mobility. Furthermore, Motorola Solutions would assume responsibility for the pension obligations of Motorola Mobility. If Motorola Mobility were to be forced into bankruptcy shortly after the breakup, Motorola Solutions may be held legally responsible for some of the business’s liabilities. The court would have to prove that Motorola had conveyed the Mobility Devices unit (renamed Motorola Mobility following the breakup) to its shareholders, fraudulently knowing that the unit’s financial viability was problematic.
Once free of debt and other obligations and flush with cash, Motorola Mobility would be in a better position to make acquisitions and to develop new phones. It would also be more attractive as a takeover target. A stand-alone firm is unencumbered by intercompany relationships, including such things as administrative support or parts and services supplied by other areas of Motorola. Moreover, all liabilities and assets associated with the handset business already would have been identified, making it easier for a potential partner to value the business.
In mid-2010, Motorola Inc. announced that it had reached an agreement with Nokia Siemens Networks, a Finnish-German joint venture, to buy the wireless networks operations, formerly part of its Enterprise Mobility Solutions & Wireless Network Devices business for $1.2 billion. On January 4, 2011, Motorola Inc. spun off the common shares of Motorola Mobility it held as a tax-free dividend to its shareholders and renamed the firm Motorola Solutions. Each shareholder of record as of December 21, 2010, would receive one share of Motorola Mobility common for every eight shares of Motorola Inc. common stock they held. Table 15.3 shows the timeline of Motorola’s restructuring effort.
Discussion Questions
1. In your judgment, did the breakup of Motorola make sense? Explain your answer.
2. What other restructuring alternatives could Motorola have pursued to increase shareholder value? Why do you believe it pursued this breakup strategy rather than some other option?
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Table 15.3}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Motorola Restructure Timeline}$
$\begin{array}{l}\begin{array}{|l|l|l|}\hline \text { Motorola (Beginning 2010) } &\text { Motorola (Mid-2010) } & \text { Motorola (Beginning 2011) } \\\hline \text { Mobility Devices } & \text { Mobility Devices } & \text { Motorola Mobility spin-off } \\\hline \begin{array}{l}\text { Enterprise Mobility Solutions \& } \\\text { Wireless Networks }\end{array} & \text { Enterprise Mobility Solutions* } & \begin{array}{l}\text { Motorola Inc. renamed Motorola } \\\text { Solutions }\end{array} \\\hline\end{array}\\\end{array}$
$\text {*Wireless Networks sold to Nokia-Siemens. }$
Kraft Foods Undertakes Split-Off of Post Cereals in Merger-Related Transaction
In August 2008, Kraft Foods announced an exchange offer related to the split-off of its Post Cereals unit and the closing of the merger of its Post Cereals business into a wholly-owned subsidiary of Ralcorp Holdings. Kraft is a major manufacturer and distributor of foods and beverages; Post is a leading manufacturer of breakfast cereals; and Ralcorp manufactures and distributes brand-name products in grocery and mass merchandise food outlets. The objective of the transaction was to allow Kraft shareholders participating in the exchange offer for Kraft Sub stock to become shareholders in Ralcorp and Kraft to receive almost $1 billion in cash or cash equivalents on a tax-free basis.
Prior to the transaction, Kraft borrowed $300 million from outside lenders and established Kraft Sub, a shell corporation wholly owned by Kraft. Kraft subsequently transferred the Post assets and associated liabilities, along with the liability Kraft incurred in raising $300 million, to Kraft Sub in exchange for all of Kraft Sub’s stock and $660 million in debt securities issued by Kraft Sub to be paid to Kraft at the end of ten years. In effect, Post was conveyed to Kraft Sub in exchange for assuming Kraft’s $300 million liability, 100% of Kraft Sub’s stock, and Kraft Sub debt securities with a principal amount of $660 million. The consideration that Kraft received, consisting of the debt assumption by Kraft Sub, the debt securities from Kraft Sub, and the Kraft Sub stock, is considered tax free to Kraft, since it is viewed simply as an internal reorganization rather than a sale. Kraft later converted to cash the securities received from Kraft Sub by selling them to a consortium of banks.
In the related split-off transaction, Kraft shareholders had the option to exchange their shares of Kraft common stock for shares of Kraft Sub, which owned the assets and liabilities of Post. If Kraft was unable to exchange all of the Kraft Sub common shares, Kraft would distribute the remaining shares as a dividend (i.e., spin-off) on a pro rata basis to Kraft shareholders.
With the completion of the merger of Kraft Sub with Ralcorp Sub (a Ralcorp wholly-owned subsidiary), the common shares of Kraft Sub were exchanged for shares of Ralcorp stock on a one for one basis. Consequently, Kraft shareholders tendering their Kraft shares in the exchange offer owned 0.6606 of a share of Ralcorp stock for each Kraft share exchanged as part of the split-off.
Concurrent with the exchange offer, Kraft closed the merger of Post with Ralcorp. Kraft shareholders received Ralcorp stock valued at $1.6 billion, resulting in their owning 54% of the merged firm. By satisfying the Morris Trust tax code regulations, the transaction was tax free to Kraft shareholders. Ralcorp Sub was later merged into Ralcorp. As such, Ralcorp assumed the liabilities of Ralcorp Sub, including the $660 million owed to Kraft.
The purchase price for Post equaled $2.56 billion. This price consisted of $1.6 billion in Ralcorp stock received by Kraft shareholders and $960 million in cash equivalents received by Kraft. The $960 million included the assumption of the $300 million liability by Kraft Sub and the $660 million in debt securities received from Kraft Sub. The steps involved in the transaction are described
-While Kraft's share value did increase following the Cadbury deal, it lagged the performance of key competitors. Why do you believe this was the case? Explain your answer.

Grasp the concept of stable personalities over time and factors influencing adult personality.

Recognize the concept and implications of "living apart together" among couples.

Comprehend the outcomes of divorce, particularly in abusive relationships.

Understand the changes in couple dynamics after children have grown, including the impact on relationship time and quality.

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Definitions:

Chronic Diseases

Long-term health conditions that persist for months or years, often incurable but can be managed through treatment and lifestyle changes.

Period Of Time

A duration in which events occur, ranging from seconds to millennia.

Health Care Costs

Expenses related to medical services, including prevention, treatment, rehabilitation, and health insurance.

Unhealthy Behaviors

Actions or habits that are detrimental to one's health, such as smoking, excessive drinking, and poor dietary choices.