Tuesday, November 2, 2010

Chrysalis for sale…again!

By Emmanuel Legrand

Here we go again: the board of independent music company Chrysalis has decided in its great wisdom that it was the right time to sell or merge the company.
Déja vu? Sure, the company was up for sale only three years ago! The plans were shelved after the credit crunch crisis and because apparently no one was prepared to match the high price asked by shareholders.
History repeats itself, and with the same causes creating the same effects, Chrysalis’s day-to-day business will be deeply affected (would you sign to a company whose future is totally uncertain?) and the life of the songwriters who are signed to the company and its employees will be severely disrupted.
Chrysalis songwriter Ray LaMontagne
With a rich catalogue of over 100,000 works, and representing the publishing of such acts as Ray LaMontagne, Damon Albarn, Mastodon, Pendulum, and dozens of other songwriters and composers, Chrysalis can be a very attractive target.
According to some press reports, “shareholders expressed their frustration at the company’s low share rating”. It did not make enough money for them.
At the moment, the company has a market capitalisation of about £74m ($119m). Shares closed on Nov 1 at 130.5p, and some estimates suggest the company could be sold at 200p a share. But that was also the price that they were expecting in 2008 and no one was prepared to pay that amount. However, the financial climate has changed and music publishing has proven to be quite resilient in the current environment. Last year, Chrysalis reported a net publisher's share (NPS) of £13.4m ($21.45 million).
Suitors, according to press reports, could include Imagem, the company backed by the Dutch pension fund, which has been very active purchasing companies in the past couple of years, and BMG Rights Management, the joint venture between German media group Bertelsmann and the “global alternative asset manager” KKR, launched in 2009. Bug Music, which is backed by private equity investors, could also be a player.
A couple of majors will probably look into the deal: Universal, always interested in new acquisitions, and Sony/ATV, whose chairman/CEO Marty Bandier has indicated in the past that he was keen to grow his catalogue through acquisitions.
Chrysalis is the perfect example of why music companies should not be publicly quoted. Over the past decade, under pressure form shareholders, the company – chaired by co-founder Chris Wright, who owns 29% of Chrysalis, and now run by CEO Jeremy Lascelles – has been going through a process of divesting from one business after another. Off went the books division, the TV production arm, and the radio group.
In the end, all that was left was the music division, mostly the publishing catalogue and the label Echo. In 2007, institutional shareholders asked Lascelles and Wright to explore the selling of the company, with no apparent success. Meanwhile, during the time the company was on the blocks, business conditions deteriorated, all signings were frozen, and the company started to lose market share. This situation is quite likely to happen again, with serious consequences on the viability of the company and the well-being of its songwriters, should the process drag on.
In an interview with Impact Magazine in 2008, Wright described the selling process as “quite debilitating for everybody connected with the company”. Lascelles added that it was a situation that the management was reluctant to get into but had to because of its institutional shareholders.
The real issue in publishing is that there is a limit to the value one can extract from a catalogue. It is the new repertoire that pulls the company forward and Chrysalis has always been noted on the market for its aggressive A&R policy, which paid serious dividends, thanks to the quality of its team and its signings. Talent requires time to develop, and investors, at least this type of investors, want a quick return.
Therefore, is hard – but not unexpected – to see any industrial strategy here from the shareholders. Building a strong entertainment company was not their concern – maximizing their investment was certainly their priority. On the other hand, Chrysalis is the work of a lifetime for Wright, and he probably has a clearer vision of the business than his shareholders.
In 2008, Wright said in Impact that having institutional shareholders helped Chrysalis expand and develop, including in the music business. At the same time, he added that they did not always take the long-term view and did not factor in the cyclical aspect of the music industry. “Institutional investors who come to an industry for a short period of time, [if] they feel that the industry is not in a growth cycle, they don’t want to be part of that any more,” was his analysis.
“They look at everything like a commodity, but music publishing is not a bad commodity if it is a commodity,” he explained. “If you own the copyright to, say, ‘My Way’ in America, which is something that we own, you have something for which, at the end of the day, you will receive a cheque. You’ll never receive a bill; you’ll always receive a cheque. It has some value, it is like a bond. It is probably a safer place to have your money than in some of the banks.”
Obviously, Chrysalis investors would prefer to put their money in some “safer” place. 

Update (10 October 2011):
Chrysalis was eventually sold in November 2010 to BMG Rights Management, the joint venture between German media group Bertelsmann and VC fund KKR, for £107m. CEO Jeremy Lascelles left the group shortly after, while chairman Chris Wright joined the supervisory board of BMG Rights Management. 
BMG Chrysalis also bought in September 2011 Bug Music for an estimated $300m. And are bidding for some of EMI Group's assets. 

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