Thursday, June 20, 2024

3 reasons why… Warner Music Group might be tempted to bid $1.8 billion for Believe

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MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles. MBW Reacts is supported by JKBX, a technology platform that offers consumers access to music royalties as an asset class.

Warner Music Group has just four more days to make a formal/binding offer to acquire Believe. After Sunday (April 7), its chance will have gone.

As you read this, WMG’s sharpest minds are poring over “confidential” financial information from Believe in a closed-off ‘data room’ – i.e. stuff you wouldn’t be able to find in public financial reports.

Depending on what they find, Warner could table a bid for Believe worth EUR €17-plus per share – valuing the French company at more than USD $1.8 billion.

This process is a risk for Believe: If WMG ultimately walks away from the ‘data room’ unsatisfied – and declines to make an official approach – the French company will have handed over sensitive material about its business to a clear market rival.

One thing’s for sure: With or without Believe, organically and/or via acquisition, WMG leader Robert Kyncl is laser-focused on opportunities for Warner in the independent artist/label space.

In a note to staff at the top of this year, Kyncl wrote that one of his priorities for the next decade was to invest WMG’s resources in expanding the firm’s distribution relationships, as well as its publishing administration business.

“We are building scaled and highly effective distribution infrastructure so that we can radically and efficiently grow the large ‘middle class’ of artists while our frontline labels can remain focused on artists with the highest potential,” said Kyncl.

As such, if Kyncl and his team choose not to table an offer for Believe, WMG may seek material acquisition opportunities elsewhere, with attractive targets potentially including the likes of Downtown Music, OneRPM, SoundCloud, Stem, TooLost, and others.

The more likely scenario, though – following all the recent fuss* – is that WMG does launch a bid for Believe in the coming days, rivaling an existing takeover proposal for the company from a consortium led by Believe founder, Denis Ladegaillerie.

(* Said ‘fuss’ included an intervention from the AMF, France’s equivalent of the SEC, to clear the path for a potential Warner bid, following an attempt by Ladegaillerie’s consortium to smite any possibility of WMG’s acquisition of Believe.)

All of this may have left you wondering precisely why Warner Music Group might be mulling a $1.8 billion+ takeover offer for Believe in the first place.

Here are three good reasons…

1) Believe’s sky-high revenues… and its thin margin

The music industry has grown accustomed to referring to Bertelsmann-owned BMG as the world’s fourth-biggest music rights company.

That’s not accurate: HYBE, publicly listed in Korea, posted annual revenue of USD $1.66 billion for 2023, significantly bigger than BMG’s equivalent figure.

Around a quarter of HYBE’s revenues come from a combination of live concerts and artist management; just under half of its revenues are attributed to recorded music alone.

BMG has a fairer shot, then, of being crowned the world’s fourth-biggest music rights management company. But even this claim may face a challenge in 2024 – with Believe’s global revenues bearing down on those at the Bertelsmann firm.

In 2023, according to financial statements, BMG posted EUR €905 million in annual revenues, up €39 million YoY. In the same year, Believe posted EUR €880 million in global revenues, up €119 million YoY.

If that YoY growth performance was repeated by both companies in 2024, Believe would overtake BMG in annual revenue terms (see below).

(Sidenote: MBW sources suggest that Downtown Music Holdings – a less catalog-heavy company than BMG or Believe – is roughly in the same ballpark, size-wise, with circa USD $900 million in global revenues forecast at the company in 2024.)

Believe and BMG could scarcely be more different when it comes to margin, however.

In 2023, BMG – primarily thanks to its ownership of a rights catalog – posted a 21.4% Operating EBITDA margin of €194 million.

Believe’s margin for its adjusted EBITDA in 2023 was 5.7%, equating to €50.3 million – around a quarter of the size of BMG’s equivalent figure. (Believe’s adjusted EBITDA margin was up vs. the 4.6% margin it posted in 2022.)

Why would any of this be attractive to Warner Music Group?

Firstly, if WMG did acquire Believe, the latter company’s revenues would be transformational for Warner’s competitive positioning.

According to MBW’s calculations based on public fiscal reports, WMG generated close to half the annual revenue of Universal Music Group in calendar 2023 across all operations (USD $6.30 billion for WMG vs. USD $12.02 billion for UMG).

In Recorded Music alone, Warner currently generates around USD $2 billion a year less than Sony‘s global music operation (see below).

The addition of Believe’s near-$1 billion annual revenues, the vast majority of which are derived from recorded music, would instantly help Warner shorten the gulf, revenue-wise, between it and the two largest players in the global music market.

This isn’t just about measuring WMG against its rivals, though.

With bigger market clout, WMG could significantly increase its bargaining might (and ability to extract value) from licensing relationships.

As Robert Kyncl put it during an earnings call in February: “Our ability to aggregate large volumes of rights across Recorded Music and Publishing provides individual artists and songwriters with more collective bargaining power when dealing with complex existing and new distributors and technologies.”

“Our ability to aggregate large volumes of rights… provides… more collective bargaining power when dealing with complex existing and new… technologies.”

Robert Kyncl, Warner Music Group, speaking in February

As for Believe’s profitability?

Warner may believe it has the infrastructure to substantially improve the French firm’s current sub-6% adjusted EBITDA margin in two key areas:

  1. Twenty years into Believe’s business, the company has built up a substantial back catalog of music, an area of obvious expertise for WMG’s global infrastructure;
  2. Believe, like many distribution/services companies before it, has arguably struggled (or shief away from) elevating local music stars into bankable global superstars. That’s especially true in the Americas, where Believe generated just 14.5% of its revenues in 2023. In contrast, Warner generates over $2.7 billion annually just in the United States – where over 46% of its revenues were created in 2023.

Speaking of the international opportunity for Warner…

India flag
Naveed Ahmed via Unsplash

2) Believe’s global footprint – especially in India

Last year, in an interview with Music Business Worldwide, Denis Ladegaillerie claimed that on major music streaming services like Spotify and YouTube, Believe was “either No.1 or No.2” in terms of recorded music market share in India.

This was a timely reminder that the three ‘major’ music companies don’t always enjoy the same level of dominance in music’s fastest-growing markets as they do in music’s most established markets.

Over the past decade, the biggest single disruptor to this pattern, in Asia and in Europe (ex-UK), is Believe.

Indeed, Believe recently told its investors that in 2023 it “gained additional market share in most key markets and positioned among Top 3 players for local acts in many European and Asian markets”.

Some examples:

  • Asia Pacific, when combined with Africa, made up over a quarter (26%) of Believe’s global revenues last year. The firm generated EUR €229 million in this region over the course of 2023, while opening its first-ever office in Japan;
  • In H2 2023, Believe built additional capabilities in Greater China, where Believe companies received five awards for Chinese rapper Capper from NetEase Cloud Music at the NetEase Annual Music Awards;
  • In its homeland of France, Believe says that it was the No.1 recorded music company in terms of market share for local acts in 2023, with a 29% market share of the Top 200 annual tracks. Believe also boasted 42 albums in the year’s Top 200 in France, according to SNEP data;
  • Believe says it ranked 48 singles in the weekly Top 100 in Germany, including three No.1 records, during the course of 2023. Believe’s clients in Germany include independent rapper Raf Camora, the most streamed artist of 2023 in the nation.

The third largest region for recorded music, Asia, grew its trade revenues by 14.9% YoY in 2023, according to fresh IFPI figures.

Today, Believe boasts a distribution/services relationship with over 10,000 labels & artists in Asia Pacific excluding Japan.

Believe has also been notably more acquisitively aggressive in key Asian markets than Warner Music Group in the past five years.

  • In 2021, Believe – which started investing in the APAC region in 2013 – acquired a minority stake in one of the largest labels in South-East Asia: Philippines-based Viva Music and Artists Group (VMAG);
  • That USD $26 million deal was soon followed by the ~$15 million acquisition of a majority stake in South India-based Think Music, a deal which itself came two years after the 100% acquisition of Venus Music in India, since rebranded as Ishtar;
  • In 2023, Believe acquired White Hill Music’s premium Punjabi music catalog in India, inclusive of its popular YouTube channel.

Denis Ladegaillerie claims that Believe is now in a “leadership position in most local markets” across Southeast Asia, and is “continuing to invest significantly on all aspects of our business premium services as well as developing [TuneCore] there”.

That’s no doubt an attractive prospect to Warner. But for Robert Kyncl, this isn’t just about local markets themselves; it’s also about the talent in those markets and their potential to cross over globally.

Believe already has one key case study in its pocket on this score: Spanish artist Iñigo Quintero’s Si No Estás, distributed by Believe, went to No.1 on Spotify’s global chart last year after finding significant popularity in the United States. It’s racked up over half a billion Spotify plays to date.

A timely reminder: The majority of artists who generated over $10,000 on Spotify last year were based in countries where English isn’t the primary language.

As Kyncl pointed out at a recent Morgan Stanley event, artists from parts of the world with relatively low-ARPU subscription markets can enjoy much higher per-stream royalties should their music find an audience in a high-ARPU market like the US.

The acquisition of Believe would ensure that Warner is involved with that scenario even more often than it is today.

Aside from geography, Warner Music Group is likely interested in Believe for its technology.

In addition to its automated service offerings for independent artists (aka TuneCore), Believe’s central technology platform is the pride of the company.

The French firm claims that its central tech enables it to “organize as a global digital platform, which develops high value-added technological solutions for all artists, adapted to each stage of their career”.

In turn, says Believe, this has empowered the company to build “a unique model based on a scalable central technology platform through the intensive use of data, which allows it to provide the same level of service in all geographies while generating economies of scale”.

That central technology platform isn’t cheap to run, especially for a company with Believe’s margin profile: the firm’s ‘Central Platform’ costs caused a EUR €78 million drag on Believe’s EBITDA in FY 2023 (see below).

For Robert Kyncl, however, Warner’s global scale and chunky margin will make the ingestion of these tech costs an unscary proposition, with a big upside.

The ability to reorientate Warner’s global services offering around Believe’s central tech – and/or learning from the efficiencies it might offer – may prove to be a key attraction in merging the two companies.

3) Denis Ladegaillerie… and the strategic opportunity

Should Warner Music Group successfully acquire Believe, it will do so at the expense of a familiar face: Denis Ladegaillerie is leading a consortium comprised of himself, EQT, and TCV, which has tabled an official bid to acquire Believe.

The idea that Ladegaillerie will totally ‘lose out’ to Warner here, though, becomes laughable when you look at the facts.

Ladegaillerie, as things stand, personally owns around 12.5% of Believe. Should WMG pull off a ‘hostile’ acquisition of the company at USD $1.8 billion, Ladegaillerie’s personal stake would be worth $225 million.

Ladegaillerie won’t walk away poor, then. But he’s widely acknowledged as one of the most forward-thinking, internationally-aware leaders working in music today (see: Believe’s pioneering moves in tech and in Asia, covered above).

So if Warner was to acquire Believe, could Robert Kyncl tempt Ladegaillerie with a top-level job within WMG?

On the one hand, Ladegaillerie may see himself as too entrepreneurially-minded, too committed to the ‘non-major’ music space, to take up such an offer.

He has, however, found success in corporate positions before.

A former lawyer who passed the New York bar in 1997, Ladegaillerie went on to run new media for Vivendi – yes, the former Universal Music Group owner – in the United States.

As Chief Strategy and Financial Officer at Vivendi, Ladegaillerie managed the restructuring and development of the first digital music service (eMusic) and the first music social networking site ( He then launched Believe in 2005.

“Over 45% of our revenue from YouTube is [from] user-generated content… I don’t see any value gap there.”

Denis Ladegaillerie going against the record industry ‘value gap’ consensus, 2017

Also worth considering: There is some positive personal history between Robert Kyncl and Denis Ladegaillerie that speaks to the latter exec’s closeness to music-affiliated technology.

Around a decade ago, when the leaders of the recorded music industry had YouTube – and its so-called “value gap” – in their crosshairs, Ladegaillerie was a loud and proud defender of the positive contribution that YouTube (and its UGC) was making to the music business.

As Ladegaillerie told MBW seven years ago: “Over 45% of our revenue from YouTube is [from] user-generated content… I don’t see any value gap there.”

The individual in charge of YouTube’s under-siege, music-biz-facing operations during that period?

Robert Kyncl.

The attractiveness of Believe for Warner and Kyncl obviously goes far beyond one sole executive, however.

With that in mind, we should also discuss recent history, and Warner’s key rivals.

Both Sony Music Group (SMG) and Universal Music Group (UMG) have made banner acquisitions in the global distribution/services space for indie artists/labels in recent years: Sony with The Orchard (2015) and AWAL (2021); Universal with Ingrooves (2019) and Mtheory’s services division (2021), plus UMG’s acquisition of 49% of [PIAS] in 2022.

These acquisitions not only strengthened the global market share of Sony and UMG in the indie distribution/services space – via The Orchard and Virgin Music Group, respectively – but also tangibly improved the technology at the heart of these offerings.

Warner’s ADA was, when it launched 30 years ago, widely seen as a technological pioneer in the world of majors renting out their infrastructure to independents.

Three decades is a long time in technology, however, and Warner’s internal indie services offering hasn’t been augmented via acquisition in the same way as those of its fiercest rivals.

If Robert Kyncl is to fulfill his ambition of “radically and efficiently growing the ‘middle class’ of artists” that Warner works with, Believe could offer a turnkey solution.

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