NEW YORK — AOL Time Warner has officially sold off the DVD/CD manufacturing unit of Warner Music Group for $1.05 billion to Canadian media-hardware maker Cinram, which beat out a financial consortium led by the distrib arm’s chairman, Jim Caparro.
Move frees up a chunk of cash to help AOL TW pay off its massive debt load, but it also marks a significant shift in the business model for a major music firm. WMG is the first of the big five to shed its hardware operations and focus on the creative side of the biz.
Under the terms of the deal, Cinram will get Warner’s WEA Manufacturing arm, as well as Warner Manufacturing Europe, its Ivy Hill media-packaging operation, Giant merchandising and the physical-distribution network of Warner-Elektra-Atlantic.
In the end, the bidding turned on the terms of the deal, not its value. The Caparro consortium’s bid was actually about 10% higher than Cinram’s final purchase price, but Cinram offered a shorter term for distribution contracts with AOL TW units — particularly Warner Home Video.
WMG will hold on to WEA’s sales and marketing divisions, which remain under Caparro’s control. It’s not clear how long the veteran distribution exec will remain at his post; a WMG rep said his status “is yet to be determined.”
With financial firms Apollo and Thomas H. Lee Partners, Caparro put together an offer with an eye toward establishing an independent manufacturing and distribution entity that could serve all five majors.
AOL TW painted the deal as a purely financial measure, cashing in on the value of the asset to alleviate some debt pressure and show progress to Wall Street ahead of its second-quarter earnings announcement this Wednesday.
Deal “demonstrates the significant progress we’ve made toward fulfilling our commitment to reducing debt,” said AOL TW topper Richard Parsons. “With this agreement, as well as our legal settlement with Microsoft and the sale of our interests in Comedy Central and GM Hughes, we have announced this year transactions generating nearly $3.8 billion in cash proceeds earmarked for debt reduction.”
Financial insiders noted the actual decline in overall AOL TW debt caused by the sales will be modest — particularly since the manufacturing unit was a significant source of cash flow for the conglom. But it is, they concede, a step in the right direction.
It also could be a prelude to a much bigger selloff of music assets from AOL TW. Company is said to be in advanced talks with Bertelsmann about merging Warner Music with BMG, spinning off a music giant with nearly 30% market share.
That deal is not expected to see the light of day for a few weeks at least. But if and when it does happen, much of the redundancy inherent in having two separate manufacturing and distribution operations would be obviated by Friday’s sale.
In the meantime, Warner Music insiders were quick to point out that the manufacturing sale was a decision made at the corporate level — not within the music group. And WMG topper Roger Ames seemed circumspect about the deal on Friday.
“Each of the companies being sold has a long and rich history as part of Warner Music,” he said, but added that “Cinram is a well-managed, international company that not only recognizes the tremendous value of these assets but has demonstrated a commitment to quality and service.”
For the next few years, at least, very little will change in practical terms for AOL TW. Conglom signed a contract with Cinram to make, print, package and distrib CDs and DVDs for Warner Music, Warner Home Video and New Line Cinema in North America and Europe.
AOL Time Warner investors seemed cheered by the prospect of any efforts to cut the debt, however modest — company’s shares were up more than 2% to finish the week at $16.74. On the Toronto Stock Exchange, Cinram shot up almost 30% to close at C$22.00 ($15.64).