LONDON (Reuters) - Bertelsmann AG is in the final stages of preparing to auction its music publishing arm, people familiar with the plans said, with a process to start as soon as early June in a sale that could fetch as much as 900 million pounds.
The proceeds from the sale of BMG Music Publishing, which owns the rights to songs by Nelly, Christina Aguilera and Coldplay, could be used by Bertelsmann to avert an unwanted IPO of the German media conglomerate by a minority shareholder.
Bertelsmann also continues to explore the possibility of selling its half of the Sony BMG recorded music business, but it is proving a far more complex and time-consuming process, said the sources, who requested anonymity to avoid harming their relationships with the company. Two people said financial information about BMG Music Publishing will be sent to prospective buyers in the next few weeks, while a third person cautioned it could take longer."Portfolio management is a normal business," a Bertelsmann spokesman said on Friday, declining to comment further.
Music publishers earn money from CD and download sales, in what is known as mechanical revenue, but because they are also paid when songs are performed live or used in films and TV programmes, publishers have been shielded from some of the piracy problems that have plagued the music industry.
"The publishing market has seen more robust growth with only 40-60 percent of revenues linked to recorded music," Goldman Sachs analysts wrote in a note last December. "The weakness in mechanical revenues has been offset by growth in performance and synchronization."
The primary figure on which suitors will be basing their offers is net publishers share (NPS), a key cashflow indicator for the sector. Analysts and industry executives estimate that BMG Music Publishing has a net publishers share roughly around $100 million.
With a buyer expected to pay a multiple of between 14 and 17 on the NPS, that would put the purchase price in the range of $1.4 billion and $1.7 billion.
Other music publishers, albeit much smaller ones, including Acuff-Rose, Windswept and Dreamworks, all have sold in the same multiple range in recent years.
Bertelsmann reported that music publishing generated 372.4 million euros (253.3 million pounds) of revenue last year, but it did not disclose the unit's NPS or operating margin.
The company said in its 2005 annual report that its music publishing arm, established in 1987, "had its most successful year to date, again generating a double-digit return on sales."
COPYRIGHT PRICE DRAG?
One significant issue that could drag down the sale price for BMG, however, is the return of U.S. copyrights to songwriters or their heirs.
In 2013, copyrights granted to a publisher before 1957 and in 1978 can be terminated by a songwriter, and each year following, additional copyright grants can be terminated. Although publishers can retain certain rights to licenses, the impact of them reverting will affect future earnings.
"People are refining their models," said one executive, who requested anonymity. "This idea that BMG is going to get 15 times NPS, when they may not control the rights for that long, is off. This issue could affect the price in a way not a lot of people have been paying attention to."
Citigroup and JPMorgan are advising Bertelsmann.
Vivendi-owned Universal Music, the world's biggest seller of recorded music, is considered an early frontrunner. It has said it wants to build its music publishing business by acquisition, and could find enormous cost savings from combining BMG's massive operation with its own.
"If you're an existing large publisher with support and sales in all the territories, you could probably take out 80 percent of the infrastructure," said Adrian Young, head of media banking for Barclays.
Sony Music is also considered by industry executives as a likely suitor with a private equity partner, as is Famous Music, a unit of Viacom's Paramount Pictures that controls the rights to 125,000 compositions including the score to "The Godfather" and songs from pop stars Shakira and Eminem.
Private equity firms, which have been attracted to the steady cash-generating aspects of the industry in recent years, have registered interest for BMG Music Publishing. They could also team up with smaller music publishers to bid.
"There's a substantial benefit for a trade buyer," Young said. "Private equity would struggle to make real capital from the current valuations because they won't have cost savings to take out."
BMG has about a 12.5 percent market share in music publishing compared with 19.7 percent at EMI , 15.5 percent at Warner Music Group , 12.5 percent at Universal Music and 7.4 percent at Sony Music, according to Goldman Sachs.
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