Spinning like a broken record?

About a year ago, a consortium of private equity firms led by Edgar Bronfman bought Warner Music Group (WMG) for $2.6bn. As the company plans to go public, one of their own acts is throwing a platinum album into the works, writes Aaron Lovell.

It sounds like a typical private equity success story.

Warner Music Group (WMG), a record label operating in the always-choppy waters of the music business, was bought by a consortium of private equity investors in early 2004. The new owners set about on a restructuring plan to cut $250 million (€195 million) in expenses annually, which brought a 17 percent jump in profits for the first half of last year. The label eliminated more than 1,000 staff positions and trimmed costs, while playing up bankable, million-selling powerhouses like Metallica, Madonna, Kid Rock and Green Day. The company is preparing for a $750 million IPO as early as this week.

The problem arose when it came time to divvy up the profits. It seems a record label is not your typical private equity portfolio company.

Linkin Park

One of WMG’s best-selling acts, Los Angeles-based hard rock act Linkin Park, is causing the label headaches on the eve of its IPO. Dubbed by WMG chairman Edgar Bronfman “the biggest rock band in the world,” the band’s first two records were massive hits during an industry slump, gaining massive radio airplay and selling 17.9 million records in the US alone.

But last week, the band took public a feud with the label in a scathing press release, decrying WMG’s new owners for “reaping a windfall of $1.4 billion,” meanwhile cutting marketing and promotional budgets. In addition to describing the terms of the quick flip, the statement also pointed out that Linkin Park will receive no direct compensation from the IPO.
The release stated: “After reading numerous accounts and daily articles about how WMG executives and corporate raiders have ridden the coattails of the creative community to extract massive rewards, Linkin Park has become increasingly offended and discouraged.”

To make a long press release short, they want out of their contract. The band still owes WMG four records.

WMG insiders told the New York Times earlier this week that the band is posturing to cover up failed negotiations between its management company The Firm and the label. The newspaper said Linkin Park had sent a letter to WMG last month requesting a portion of the proceeds from the IPO. Warner reportedly rejected the offer and further horse-trading over profit cuts and larger advances broke down, leading to the current stand-off.

To add insult to injury, WMG also reportedly asked Linkin Park to play at the New York Stock Exchange to celebrate the IPO. Guitarist Brian Delson told the newspaper that the Wall Street performance “just exemplifies how out of touch the ownership of the Warner Music Group is with our band.”
WMG’s IPO is expected to raise as much as $750 million for the label’s current owners, including Bronfman’s Lexa Partners, Thomas H. Lee Partners, Bain Capital and Providence Equity Partners who bought the struggling record label in late 2003.

Ultimately, the free market will determine how much value Linkin Park adds to WMG’s roster, but that didn’t stop Linkin Park from offering their opinion.

“The loss of future Linkin Park recordings will be disastrous for WMG,” the band said in the press release. “While there are hundreds of bands signed to the WMG roster, the music business is still a hit-driven industry.”