May 21, 2009

By By Glenn Peoples, Nashville

Warner Music Group's offering of $1.1 billion in bonds this week, a measure to improve liquidity and flexibility, has WMG in improved position and the market has responded favorably.

Investors such as Capital Research and Management and BlackRock "piled on" the bond offering, a source told the New York Post. The issuance prompted Moody's Investors Service to upgrade the company's credit rating. Wedbush Morgan analyst Chris White raised his target price - and kept his "hold" rating - while warning investors that he believes the increase in WMG's share price "is outpacing the improvement in company fundamentals."

Over the last few years, Warner Music Group has performed relatively well in a struggling industry. It has gained market share and, more recently, improved its balance sheet by adding hundreds of millions to its cash reserves. Though currently on a break from M&A activities, the company may have good opportunities in the coming years. Distressed assets are likely to appear as music companies of all stripes struggle through this digital era's war of attrition. EMI, as Pali Research pointed out, could once again be a merger target. Or WMG could add to its artist services.

A merged EMI and WMG would address some of the key problems the companies face today. Both have physical distribution divisions that are going to support far less volume in the coming years. Combining them would bring back the economies of scale upon which distribution relies. EMI's strength in recorded music in Europe would be balanced by WMG's strength in recorded music in North America.

A combination of the pair's burgeoning artist services divisions would be beneficial as well. As was the case with the Sony BMG merger, some publishing assets may need to be sold in order to gain regulatory approval. Such a sale would provide the combined company much-needed cash and in today's market there would be no shortage of bidders.

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