1. Label Prices Gone Wild? Why Wall Street Is Buzzing Even As Music Companies Take a Conservative View

Label Prices Gone Wild? Why Wall Street Is Buzzing Even As Music Companies Take a Conservative View

Label Prices Gone Wild? Why Wall Street Is Buzzing Even As Music Companies Take a Conservative View

Music publishing assets have long attracted institutional investors such as private equity firms and pension funds because of their predictable income streams and due to asset appreciation: The average price of publishing catalogs has climbed more than 50 percent, to over 15 times their gross profit, since 2010. 

But now, with streaming steadily hooking more monthly subscribers and paying out nearly five times more per stream to labels than to publishers, recorded masters and record labels are starting to look like dependable investments too -- with rising prices to match. 

In the past two years, BMG and Concord Music Group, both longtime aggressive buyers of music publishing assets, have shifted their focus to buying labels and master recordings, while Shamrock Capital Advisors recently acquired the Om dance label and a stake in the royalty income stream from Eminem's masters.

"Now that the record industry is coming back, we are looking more aggressively at [recorded] assets," says Primary Wave CEO Larry Mestel. "Before we were opportunistic when masters came up for sale, but less focused on pursuing such deals."

Now, with Big Machine Label Group -- home to Taylor Swift's catalog -- on the market for $300 million to $350 million, label prices could establish a new benchmark, and some investors are betting prices will rise higher as CD sales continue to decline.

"If you are over in a post- physical world [and] you can outsource most functions to a distributor and a virtual label company, then you may see more institutional investors coming in," says an investment banker. Moreover, some of the biggest banks on Wall Street are among those fueling interest in the sector through its rosy analyst reports as the music industry rebounds.

"That is something that we didn't have six or seven years ago, and these types of reports attract institutional investors," says a music financial executive.

But, sources say, the price of recorded music may have a lower ceiling than that of publishing -- for a number of reasons. "In order to responsibly manage and grow the value of masters, you need a completely different platform from publishing. Managing masters takes significantly more human and technological resources per asset to grow their value, with no scale benefits across both assets," says Concord Music chief business development officer Steve Salm. "Acquirers with recorded platforms will always have an advantage over the financial investor or new entrant. The barriers to entry on the recorded side are much more expensive as it relates to properly allocating resources for distribution, data management, marketing, licensing, high- end packaging and social management." 

Also holding back label pricing: The major music companies are taking a conservative view, with executives in their camps privately denouncing some deals as crazy, stupid, or both.

When streaming started generating steady digital performance royalties for labels, a royalty stream that only publishers had reaped from radio broadcasters, "people fooled themselves into thinking that record masters mirrored music publishing," says a music executive. "But once you really scratch the surface, the management of the two music asset classes have no overlap."

HOW INVESTORS LOOK AT MUSIC PUBLISHING ASSETS

It's important to recognize when looking at the two music asset classes is that while they trade on similar sounding multiples -- net publisher share (NPS) and net label share (NLS) -- the definitions for those two barometric multiples are different; and that recorded music assets more typically trade on earnings before interest, taxes, depreciation and amortization (EBITDA) and net label share has only been introduced to industry jargon in the last few years. 

Net publisher share represents profits after royalties and other artist related costs are subtracted while net label share is profit after subtracting artist royalties, publishing royalties on downloads and physical formats, manufacturing costs, distribution costs and accounting reserves for various potential write-offs including returns, product breakage, and product obsolescence, but not marketing costs and the other overhead expenses that when subtracted out derives EBITDA.

Back at the start of this decade, music publishing assets were typically trading at a multiple of 10-12 times NPS  but thanks to the turn around in the music industry's fortunes due to streaming, those assets are trading at a 15 times NPS multiple and above. While an occasional deal involving recorded master or record labels that included iconic titles may have hit the ten times NLS multiple, most recorded music assets have been trading at the 7-8 times NLS multiple.

Historically, however the main barometer for measuring deals involving recorded music masters or record labels has been EBITDA and that multiple has shown considerable appreciation. To the view of some investors, the EBIDTA level for master recordings/labels are now in the double digits--a 10 Xs multiple or higher--for recorded music catalog and labels, which are a long way from the 3-4 times levels that such assets traded for back in the 1990's and the 6-7 times multiple they carried in the 2000's, according to one former investor in music industry assets.

This article originally appeared in the Dec. 8 issue of Billboard.