Warner Music Group Corp will find out next week if investors are singing its tune as the world's fourth-largest music company tries to woo them with a $750 million initial public offering. Warner Music, home to recording artists Madonna and Green Day, is going public as the music industry has stabilised somewhat after a protected slump and the US IPO market is awakening after a sleepy start to the second quarter. This past week was by far the busiest of the second quarter for IPOs listing in the United States, with 7 IPOs raising $1.5 billion, according to data provider Dealogic.
Of the week's high-profile debuts, Morningstar rose 8 percent, but shares of Lazard Ltd slid 4 percent as its complicated $854.6 million IPO kept many investors at bay.
Warner Music's offering comes a bit more than a year after Time Warner Inc sold the music company to a group of private equity partners led by media mogul Edgar Bronfman Jr. for $2.6 billion.
The music industry, which besides Warner is dominated by Vivendi Universal's Universal Music, Sony Corp's and Bertelsmann AG's Sony BMG and EMI Group Plc, is trying to bounce back from several years of plummeting music sales, hurt by CD piracy, illegal online downloads and competition from video games and DVDs.
Bronfman has been working to strip millions of dollars of costs out of Warner Music. The company is enjoying a profitability spurt after cutting its work force 28 percent. It posted a fourth-quarter profit of $36 million, but its revenue fell 7.6 percent to $1.09 billion compared with a year earlier.
Warner has filed for a 32.6 million share IPO, outlining a target price of $22 to $24 per share. Underwriters, led by Goldman Sachs & Co and Morgan Stanley, have the option to buy an additional 4.9 million share to cover excess demand.
Priced in the middle of its estimated range, Warner would have a market value of $3.3 billion, approaching the $3.6 billion market value of close competitor and long-rumoured merger partner, No 3 music company EMI.
The IPO allows Warner to raise money to pay down debt, which totals about $2.5 billion.
But there are numerous struggles on the horizon for Warner and the music industry. At the moment, Warner Music is in a dispute with one of its more successful acts, rap metal band Linkin Park, which demanded to be released from its contract before a remaining four-album commitment ends.
In addition, New York Attorney General Eliot Spitzer is investigating the music industry's practice of paying independent promoters millions of dollars a year to help secure valuable radio air time for songs. In April, Warner Music said it received its third subpoena as part of the probe.
Fulcrum Global Partners analyst Richard Greenfield, citing a recent downturn in US album sales, said he believes that pricing Warner at $22 to $24 was too high.
Overall album sales year-to-date are down 8 percent after a 1.6 percent rise in 2004 over 2003, according to Nielsen SoundScan.
"While the music industry has finally begun to embrace the digital opportunity, creating the potential for sustainable long-term revenue growth, we are unclear as to how soon the benefits of new technologies will take hold and, more importantly, how quickly the industry can alter its cost structure to take advantage of new economic models," Greenfield said in a research note.
Warner Music is expected to price its IPO on Tuesday and make its debut on the New York Stock Exchange under the symbol on Wednesday.
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