Old hits can raise record returns

Michael Jackson, the Grateful Dead and The Sound of Music are finding new fans in pension funds, private equity and banks convinced that old hits will play on as technology expands the way people use music.

Competition is increasing for music publishing catalogues and the income they generate from stores, radio and web play, ads and movies. Last month KKR & Co, the private-equity firm run by Henry Kravis and George Roberts, bought a majority stake in Bertelsmann's music-rights unit. Unlike recorded music, publishing is buffered from falling CD sales by more diverse revenue sources. Owners can earn cash returns of seven per cent to 20 per cent or more a year, depending on the songs and how they're marketed, investors and dealmakers say.

Jackson's death onJune 25 heightened interest in his stake in a catalogue that includes Beatles tracks. "Music-publishing assets can be equivalent to great real-estate investments," said John Frankenheimer, co-chairman of Loeb & Loeb, a Los Angeles-based law firm involved in several sales. "You have to do the analysis to understand the difference between prime beachfront property, a distressed asset with great potential and a run-down property." Publishers own rights to lyrics and melodies. The biggest owners continue to be record labels, such as Vivendi's Universal Music Group and EMI Group. In addition to KKR, recent buyers have included private-equity firms Pegasus Capital Advisors and Spectrum Equity Investors, the Dutch pension fund Stichting Pensioenfonds ABP and Credit Suisse Group.

"I view it as a very conservative investment," said Rodney Cohen, co-managing partner at Pegasus Capital, a $2 billion fund with offices in New York. "They will always have value, and as long you buy properly you have a tremendous amount of downside protection and tremendous upside potential."

Pegasus bought Spirit Music Group in April, gaining songs from the Grateful Dead, Elvis Presley and Frank Sinatra. Spectrum Equity's holdings include Bug Music, which oversees some 250,000 copyrights.

Publishing isn't risk free, said Donald Passman, an entertainment attorney with Gang, Tyre, Ramer and Brown Inc in Beverly Hills, California. The health of the music industry, falling retail sales and smaller ad budgets contributed to a 40 per cent to 50 per cent drop in the value of publishers in the past five years, he said.

"The music business is skittish, and there is a potential that income will drop for the next few years before the ship rights itself," said Passman, author of All You Need to Know About the Music Business. Falling values are attracting investors, he added.

KKR agreed to pay $347m for the stake in Bertelsmann's music-rights unit, said two people with knowledge of the situation.

The group clinched its first deal last month, buying Los Angeles-based Crosstown, owner of an 8,000-song catalogue that includes Ricky Martin's Livin' La Vida Loca and Sheryl Crow's All I Wanna Do. The seller was the investment arm of Minneapolis-based grain processor Cargill. "Our goal is to create a sizable new entrant in the music publishing business over the next five years," Philipp Freise, a KKR director responsible for European media investments, said in an interview. "We will compete against the incumbents."

Jackson's death has spurred interest in his stake in Sony/ATV Music Publishing, according to Rob Wiesenthal, chief financial officer of the Tokyo-based Sony's United States unit. "They're inquiring," Wiesenthal said. "But it's not for sale."

The late singer began building his portfolio in 1985 with the $47.5m purchase of Beatles tracks. His half stake in Sony/ATV is worth at least $750m, Billboard said. The estate also controls MiJac Publishing, comprising much of Jackson's solo work.

EMI's publishing would attract investors if it became available, said Steve Gordon, an industry attorney in New York.

The label's owner, London-based Terra Firma Capital Partners, is seeking to refinance loans used to fund the 2007 purchase of the company, according to the Financial Times. Andrew Dowler, a Terra Firma spokesman, declined to comment.

Publishing can produce cash returns of 20 per cent a year or more, said Lawrence Mestel, chief executive of Primary Wave, the Credit Suisse-backed publisher.

New York-based Primary Wave, which holds rights to songs by Nirvana's Kurt Cobain and Aerosmith's Steven Tyler, has marketed Cobain's songs to shoemaker Converse and Aerosmith's to lottery company GTECH Holdings, Mestel said.

Frankenheimer, who has represented ABP and Bertelsmann, said a payback of seven per cent to 12 per cent is conservative for a "high quality and properly managed" catalogue.

In the biggest deal to date, Vivendi's Universal Music Group paid $2.1bn for Bertelsmann BMG's catalogue in 2006, when the German company was selling assets to repay debt from share repurchases, according to spokesman Tobias Riepe. The catalogue includes songs from Coldplay and Barry Manilow.

The Dutch pension ABP, which oversees retirement assets of about 2.7m government employees, outbid established publishers in April for the works of Richard Rodgers and Oscar Hammerstein II, including The Sound of Music and Oklahoma! The songs are managed by ABP's Imagem Music Group, which has revenue exceeding €100m and rights to more than 200,000 pieces of music. Those include Jackson's You Are Not Alone.

Revenue from Jackson songs like Thriller and Billie Jean will set "royalty history," according to the United Kingdom collection agency PRS for Music.

"For tragic or joyful reasons, in this case tragic, songs can do well," said Ronald Wuijster, a managing director of APG Asset Management, which runs the pension's portfolio. "You take that into account, this is the reason we invest in these rights. Music is so important it will always be used."

Yet, while investors have banked on the highest selling stars with their investments, music these days is also drawing the business of entrepreneurs looking to back up and coming artists.

One such avenue to locate this new blood are online websites such as Putiton.com. This content sharing site allows musicians, among other artists, to upload their demo work for free. Users can log on to vote for their favourite acts, write to them or even contact them to broker a deal. Website creator Max Fraser tells Emirates Business: "My brother Greg and I are merely the mediators. We don't get any commission, neither do we have a say in what deals are being made between investors and the artists.

"Our main aim is to provide a platform for talented artists who have a great catalogue of work but don't know how to market themselves."

Max, 25, who is a documentary filmmaker, along with his musician brother, know firsthand how difficult it is to obtain startup capital in the entertainment business.

"The music industry, especially the record labels have taken a hit over the past few years courtesy of the internet boom and piracy. If artists such as Radiohead can bypass the labels to release their new music online, why can't newcomers do the same through our website?"

Why not indeed. (With input from Bindu Rai)


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