UPDATED: If at first a pandemic trips up your initial public offering, try, try again — even during a week of social unrest — especially when investors seem eager to test audio streaming waters in a reinvigorated stock market. That’s the incentive for Warner Music Group to revive the IPO that got scotched earlier this year when the pandemic chilled Wall Street.
Priced at $25 per share, WMG has a market capitalization value of around $12.7 billion — the year’s biggest I.P.O. to date. And although it showed the company returning quickly to business after “Blackout Tuesday” — an initiative started by two executives, one from Warner’s Atlantic Records, in which the music industry basically stopped everyday operations to protest police violence against the black community — it countered any negative optics by announcing five minutes after the IPO that it is donating some $100 million to social-justice organizations.
Warner first announced its intention to go public on Feb. 6 after a 10% stake in competitor Universal Music Group by led by huge Chinese tech company Tencent handsomely lifted the largest major’s valuation to a whopping $33 billion. Soon, though, the spread of coronavirus caused Wall Street to wobble, and Warner withdrew the offering on March 2.
Now, with the U.S. and other parts of the world stepping optimistically toward a post-lockdown world, investors seem eager to ride what feels like a promising streaming market, and Warner Music is an easy way to make that bet.
“Post-COVID, it’s shed a bright spotlight on streaming, as well as penetration rates in the United States, in Japan and other regions, which speaks to a major growth opportunity for streaming players going forward,” says Daniel Ives, managing director of equity research at Wedbush Securities.
“That’s what Warner’s going after, along with Spotify and Apple,” Ives adds. “In this quasi-stay-at-home world over the next 12-18 months, that’s a goldmine for players like Warner Music in terms of how they go after the market. As a Big Three label, with Cardi B, Ed Sheeran, Bruno Mars and others, they have a content advantage: In terms of physical sales as well as recordings, COVID has been a headwind, but for streaming, it’s been a tailwind,” Ives adds.
“If you want to be investing in music right now, Warner Music is a solid play with solid brands and great artists,” says Gigi Johnson, president of think tank Maremel Institute who is on the faculty at UCLA Herb Alpert School of Music. “There are other plays, but they tend to be more distribution-oriented. With Warner, you do have diversification across geographies and you also diversification across revenue streams so it’s a solid major brand that has concrete brands in it and relationships with consumer brands. You’re getting all sorts of things all in one package. You have some impact from what’s happening in live music [which has been decimated by the pandemic], but minimal compared to what else is happening out there.”
One key link between the Warner IPO and the stake that Tencent and its partners made in Universal Music: new investors have no voice in either major’s governance. In Warner’s case, Len Blavatnik’s Access Industries still holds the wheel.
“Investors demonstrate whether they like the structure if they put their money on it,” says Ives. “I think that’s why those investors of other companies are closely watching to see how this does and what the appetite is just given some of the ownership structure.
“But, at the end of the day it’s a pure-play way to play streaming and Warner is a behemoth from a content perspective. I think there’s many ways they could take that path of growth, which is what you’ve seen with Spotify and Apple Music, but here you have a pure-play label to go after,” Ives adds.
“There’s a lot of enthusiasm and experimentation in finding better delivery for the fan,” says Johnson. “There are a lot of interesting business models in trial and that pays off for Warner as well. It would help them with their dependency on Spotify, YouTube, Apple, Amazon and some of the major DSPs.
Ives and Johnson both note that without the additional businesses attached to Universal Music parent Vivendi and Sony Music parent Sony, Warner Music gives investors an easier path to capitalize on a music business that, even amid the pandemic, looks far healthier than it did 10 or 15 years ago.
“If you’re betting on streaming and growth dynamics in the music industry over the coming years, this is your shot,” Ives says. “A lot of times when a company comes out, there’s a lot of other noise or parts of a business that investors don’t necessarily want a piece of. Here it’s a cleaner way to play some of the growth dynamics that are showing up in the market today.”
However, U.K.-based music and digital analyst Mark Mulligan of MIDiA Research is more cautious, noting that growth in streaming revenue is already leveling off in Western countries. “U.S. penetration is already high,” he says, citing that its 105 million subscriptions is essentially 35% of the population, “so growth from here on in will be much slower. Global penetration is only 7%, but much of the global population is years away from having smart phones with data plans, and even when they do will have very low spending power. There is a lot of growth left in the global market, but subscriber growth will thus be much faster than revenue growth. Also, emerging markets growth will benefit non-western labels more.
“All of this said,” he concludes, “there is enough growth left for Western label repertoire to ensure that labels like WMG will likely look forward to years of further, streaming driven growth, though 2020 will likely be a big slowdown year due to COVID-19 impacting physical sales and royalty income from sync and public performance.”
However, Johnson and Ives see the glass half-full, citing Warner’s existing global reach and the potential for streaming to ramp up its worldwide reach.
Ives estimates U.S. household penetration for paid audio stream subscriptions stands at around 25%. That leaves room for growth here, while he and Johnson both see potential in other parts of the world. “I do think that Warner can be benefitting from markets that are just getting into streaming,” says Johnson. “They have a decent foothold in China, they have a decent footprint in a lot of local markets where streaming is growing.”
While she sees Warner as a solid bet for investors eager to tap the streaming market and a healthier music business, Johnson imagines it’s less appealing for those who seek aggressive growth. “As an investor at an earlier stage of life, I might try to find something with a big upside. I think Warner will have its share of the overall sector growth and has a good international footprint, which will be important, but I do think that really high growth is going to come out of custom solutions.
“There’s probably new technologies that will crack open some doors but I don’t think we’re in a multiple of revenue business anymore. I don’t think we were but we’ve been hacking away decent percentage increases. Now, you’re kind of getting to ‘Where’s the big growth coming from?’ Other than going into some international market, there’s no low hanging fruit left, at least not that’s obvious.”