MBW Reacts is a collection of analytical commentaries from Music Enterprise Worldwide written in response to main current leisure occasions or information tales. Solely MBW+ subscribers have limitless entry to those articles. MBW Reacts is supported by JKBX, a expertise platform that gives customers entry to music royalties as an asset class.
Warner Music Group has simply 4 extra days to make a proper/binding supply to accumulate Imagine. After Sunday (April 7), its probability could have gone.
As you learn this, WMG’s sharpest minds are poring over “confidential” monetary data from Imagine in a closed-off ‘information room’ – i.e. stuff you wouldn’t be capable to discover in public monetary studies.
Relying on what they discover, Warner may desk a bid for Imagine value EUR €17-plus per share – valuing the French firm at greater than USD $1.8 billion.
This course of is a danger for Imagine: If WMG finally walks away from the ‘information room’ unhappy – and declines to make an official method – the French firm could have handed over delicate materials about its enterprise to a transparent market rival.
One factor’s for certain: With or with out Imagine, organically and/or by way of acquisition, WMG chief Robert Kyncl is laser-focused on alternatives for Warner within the unbiased artist/label house.
In a be aware to employees on the prime of this yr, Kyncl wrote that one in every of his priorities for the subsequent decade was to speculate WMG’s sources in increasing the agency’s distribution relationships, in addition to its publishing administration enterprise.
“We’re constructing scaled and extremely efficient distribution infrastructure in order that we are able to radically and effectively develop the big ‘centerclass’ of artists whereas our frontline labels can stay centered on artists with the best potential,” mentioned Kyncl.
As such, if Kyncl and his crew select not to desk a suggestion for Imagine, WMG could search materials acquisition alternatives elsewhere, with engaging targets doubtlessly together with the likes of Downtown Music, OneRPM, SoundCloud, Stem, TooLost, and others.
The extra possible state of affairs, although – following all of the current fuss* – is that WMGdoes launch a bid for Imagine within the coming days, rivaling an present takeover proposal for the corporate from a consortium led by Imagine founder, Denis Ladegaillerie.
(* Stated ‘fuss’ included an intervention from the AMF, France’s equal of the SEC, to clear the trail for a possible Warner bid, following an try by Ladegaillerie’s consortium to smite any chance of WMG’s acquisition of Imagine.)
All of this may increasingly have left you questioning exactly why Warner Music Group may be mulling a $1.8 billion+ takeover supply for Imagine within the first place.
Listed below are three good causes…
1) Imagine’s sky-high revenues… and its skinny margin
That’s not correct: HYBE, publicly listed in Korea, posted annual income of USD $1.66 billion for 2023, considerably larger than BMG’s equal determine.
Round 1 / 4 of HYBE’s revenues come from a mixture of reside live shows and artist administration; slightly below half of its revenues are attributed to recorded music alone.
BMG has a fairer shot, then, of being topped the world’s fourth-biggest music rights administration firm. However even this declare could face a problem in 2024 – with Imagine’s world revenues bearing down on these on the Bertelsmann agency.
In 2023, in line with monetary statements, BMG posted EUR €905 million in annual revenues, up €39 million YoY. In the identical yr, ImaginepostedEUR €880 million in world revenues, up €119 million YoY.
If that YoY progress efficiency was repeated by each corporations in 2024, Imagine would overtake BMG in annual income phrases (see under).
Imagine and BMG may scarcely be extra totally different relating to margin, nonetheless.
In 2023, BMG – primarily due to its possession of a rights catalog – posted a 21.4% Working EBITDA margin of €194 million.
Imagine’s margin for its adjusted EBITDA in 2023 was 5.7%, equating to €50.3 million – round 1 / 4 of the dimensions of BMG’s equal determine. (Imagine’s adjusted EBITDA margin was up vs. the 4.6% margin it posted in 2022.)
Why would any of this be engaging to Warner Music Group?
Firstly, if WMG did purchase Imagine, the latter firm’s revenues could be transformational for Warner’s aggressive positioning.
In accordance with MBW’s calculations primarily based on public fiscal studies, WMG generated near half the annual income of Common Music Group in calendar 2023 throughout all operations (USD$6.30 billion for WMG vs. USD$12.02 billion for UMG).
In Recorded Music alone, Warner presently generates round USD$2 billion a yr lower than Sony‘s world music operation (see under).
The addition of Imagine’s near-$1 billion annual revenues, the overwhelming majority of that are derived from recorded music, would immediately assist Warner shorten the gulf, revenue-wise, between it and the 2 largest gamers within the world music market.
This isn’t nearly measuring WMG towards its rivals, although.
With larger market clout, WMG may considerably improve its bargaining may (and talent to extract worth) from licensing relationships.
As Robert Kyncl put it throughout an earnings name in February: “Our means to mixture massive volumes of rights throughout Recorded Music and Publishing gives particular person artists and songwriters with extra collective bargaining energy when coping with advanced present and new distributors and applied sciences.”
“Our means to mixture massive volumes of rights… gives… extra collective bargaining energy when coping with advanced present and new… applied sciences.”
Robert Kyncl, Warner Music Group, talking in February
As for Imagine’s profitability?
Warner could imagine it has the infrastructure to considerably enhance the French agency’s present sub-6% adjusted EBITDA margin in two key areas:
Twenty years into Imagine’s enterprise, the corporate has constructed up a considerable again catalog of music, an space of apparent experience for WMG’s world infrastructure;
Imagine, like many distribution/providers corporations earlier than it, has arguably struggled (or shief away from) elevating native music stars into bankable world superstars. That’s very true in the Americas, the place Imagine generated simply 14.5% of its revenues in 2023. In distinction, Warner generates over $2.7 billion yearly simply in america – the place over 46% of its revenues have been created in 2023.
Talking of the worldwide alternative for Warner…
Naveed Ahmed by way of Unsplash
2) Imagine’s world footprint – particularly in India
Final yr, in an interview with Music Enterprise Worldwide, Denis Ladegaillerie claimed that on main music streaming providers like Spotify and YouTube, Imagine was “both No.1 or No.2” by way of recorded music market share in India.
This was a well timed reminder that the three ‘main’ music corporations don’t all the time take pleasure in the identical stage of dominance in music’s fastest-growing markets as they do in music’s most established markets.
Over the previous decade, the largest single disruptor to this sample, in Asia and in Europe (ex-UK), is Imagine.
Certainly, Imagine lately informed its traders that in 2023 it “gained further market share in most key markets and positioned amongst Prime 3 gamers for native acts in lots of European and Asian markets”.
Some examples:
Asia Pacific, when mixed with Africa, made up over 1 / 4 (26%) of Imagine’s world revenues final yr. The agency generated EUR €229 million on this area over the course of 2023, whereas opening its first-ever workplace in Japan;
In H2 2023, Imagine constructed further capabilities in Larger China, the place Imagine corporations acquired 5 awards for Chinese language rapper Capper from NetEase Cloud Music on the NetEase Annual Music Awards;
In its homeland of France, Imagine says that it was the No.1 recorded music firm by way of market share for native acts in 2023, with a 29% market share of the Prime 200 annual tracks. Imagine additionally boasted 42 albums within the yr’s Prime 200 in France, in line with SNEP information;
Imagine says it ranked 48 singles within the weekly Prime 100 in Germany, together with three No.1 information, in the course of the course of 2023. Imagine’s purchasers in Germany embody unbiased rapper Raf Camora, essentially the most streamed artist of 2023 within the nation.
The third largest area for recorded music, Asia, grew its commerce revenues by 14.9% YoY in 2023, in line with recent IFPI figures.
Immediately, Imagine boasts a distribution/providers relationship with over 10,000 labels & artists in Asia Pacific excluding Japan.
Imagine has additionally been notably extra acquisitively aggressive in key Asian markets than Warner Music Group previously 5 years.
In 2021, Imagine – which began investing within the APAC area in 2013 – acquired a minority stake in one of many largest labels in South-East Asia: Philippines-based Viva Music and Artists Group (VMAG);
That USD$26 million deal was quickly adopted by the ~$15 million acquisition of a majority stake in South India-based Suppose Music, a deal which itself got here two years after the 100% acquisition of Venus Music in India, since rebranded as Ishtar;
In 2023, Imagine acquiredWhite Hill Music’s premium Punjabi music catalog in India, inclusive of its well-liked YouTube channel.
Denis Ladegaillerieclaims that Imagine is now in a “management place in most native markets” throughout Southeast Asia, and is “persevering with to speculate considerably on all features of our enterprise premium providers in addition to growing [TuneCore] there”.
That’s little doubt a pretty prospect to Warner. However for Robert Kyncl, this isn’t nearly native markets themselves; it’s additionally concerning the expertise in these markets and their potential to cross over globally.
Imagine already has one key case research in its pocket on this rating: Spanish artist Iñigo Quintero’sSi No Estás, distributed by Imagine, went to No.1 on Spotify’s world chart final yr after discovering vital recognition in america. It’s racked up over half a billion Spotify performs up to now.
As Kyncl identified at a current Morgan Stanley occasion, artists from components of the world with comparatively low-ARPU subscription markets can take pleasure in a lot larger per-stream royalties ought to their music discover an viewers in a high-ARPU market just like the US.
The acquisition of Imagine would be certain that Warner is concerned with that state of affairs much more usually than it’s at this time.
Apart from geography, Warner Music Group is probably going concerned with Imagine for its expertise.
Along with its automated service choices for unbiased artists (aka TuneCore), Imagine’s central expertise platform is the satisfaction of the corporate.
The French agency claims that its central tech permits it to “arrange as a worldwide digital platform, which develops excessive value-added technological options for all artists, tailored to every stage of their profession”.
In flip, says Imagine, this has empowered the corporate to construct “a novel mannequin primarily based on a scalable central expertise platform by means of the intensive use of information, which permits it to offer the identical stage of service in all geographies whereas producing economies of scale”.
That central expertise platform isn’t low cost to run, particularly for a corporation with Imagine’s margin profile: the agency’s ‘Central Platform’ prices induced a EUR€78 million drag on Imagine’s EBITDA in FY 2023 (see under).
For Robert Kyncl, nonetheless, Warner’s world scale and chunky margin will make the ingestion of those tech prices an unscary proposition, with a giant upside.
The power to reorientate Warner’s world providers providing round Imagine’s central tech – and/or studying from the efficiencies it would supply – could show to be a key attraction in merging the 2 corporations.
3) Denis Ladegaillerie… and the strategic alternative
Ought to Warner Music Group efficiently purchase Imagine, it is going to achieve this on the expense of a well-recognized face: Denis Ladegaillerie is main a consortium comprised of himself, EQT, and TCV, which has tabled an official bid to accumulate Imagine.
The concept Ladegaillerie will completely ‘lose out’ to Warner right here, although, turns into laughable whenever you have a look at the info.
Ladegaillerie, as issues stand, personally owns round 12.5% of Imagine. Ought to WMG pull off a ‘hostile’ acquisition of the corporate at USD$1.8 billion, Ladegaillerie’s private stake could be value $225 million.
Ladegaillerie gained’t stroll away poor, then. However he’s broadly acknowledged as one of the forward-thinking, internationally-aware leaders working in music at this time (see: Imagine’s pioneering strikes in tech and in Asia, lined above).
So if Warner was to accumulate Imagine, may Robert Kyncl tempt Ladegaillerie with a top-level job inside WMG?
On the one hand, Ladegaillerie might even see himself as too entrepreneurially-minded, too dedicated to the ‘non-major’ music house, to take up such a suggestion.
He has, nonetheless, discovered success in company positions earlier than.
A former lawyer who handed the New York bar in 1997, Ladegaillerie went on to run new media for Vivendi – sure, the previous Common Music Group proprietor – in america.
As Chief Technique and Monetary Officer at Vivendi, Ladegaillerie managed the restructuring and improvement of the primary digital music service (eMusic) and the primary music social networking web site (MP3.com). He then launched Imagine in 2005.
“Over 45% of our income from YouTube is [from] user-generated content material… I don’t see any worth hole there.”
Denis Ladegaillerie going towards the document trade ‘worth hole’ consensus, 2017
Additionally value contemplating: There may be some optimistic private historical past between Robert Kyncl and Denis Ladegaillerie that speaks to the latter exec’s closeness to music-affiliated expertise.
Round a decade in the past, when the leaders of the recorded music trade had YouTube – and its so-called “worth hole” – of their crosshairs, Ladegaillerie was a loud and proud defender of the optimistic contribution that YouTube (and its UGC) was making to the music enterprise.
As Ladegaillerie informed MBW seven years in the past: “Over 45% of our income from YouTube is [from] user-generated content material… I don’t see any worth hole there.”
The person answerable for YouTube’s under-siege, music-biz-facing operations throughout that interval?
Robert Kyncl.
The attractiveness of Imagine for Warner and Kyncl clearly goes far past one sole government, nonetheless.
With that in thoughts, we must also focus on current historical past, and Warner’s key rivals.
Each Sony Music Group (SMG) and Common Music Group (UMG) have made banner acquisitions within the world distribution/providers house for indie artists/labels lately: Sony with The Orchard (2015) and AWAL (2021); Common with Ingrooves (2019) and Mtheory’s providers division (2021), plus UMG’s acquisition of 49% of [PIAS] in 2022.
These acquisitions not solely strengthened the worldwide market share of Sony and UMG within the indie distribution/providers house – by way of The Orchard and Virgin Music Group, respectively – but in addition tangibly improved the expertise on the coronary heart of those choices.
Warner’s ADA was, when it launched 30 years in the past, broadly seen as a technological pioneer on this planet of majors renting out their infrastructure to independents.
Three many years is a very long time in expertise, nonetheless, and Warner’s inside indie providers providing hasn’t been augmented by way of acquisition in the identical manner as these of its fiercest rivals.
If Robert Kyncl is to satisfy his ambition of “radically and effectively rising the ‘center class’ of artists” that Warner works with, Imagine may supply a turnkey answer.
