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Warner tunes up for IPO

Move will test investors' faith

Is Wall Street really ready to dance to the music?

One year after buying Warner Music Group from Time Warner for $2.6 billion, Edgar Bronfman Jr. and his private partners are taking the world’s fourth largest music major public.

Warner Music may be a leaner, meaner operation under chairman-CEO Bronfman, but fears abound that the music industry’s business model remains fundamentally flawed, badly damaged by a piracy pandemic. An IPO will test just how much faith investors have.

Company filed papers Friday with the Securities and Exchange Commission to raise up to $750 million in an initial public offering.

Could lead to merger

From the outset, Bronfman made it clear he wanted Warner Music to become the only stand-alone music major publicly traded in the U.S. Move also could presage a merger with EMI, which is traded publicly in the U.K.

Taking Warner public would give Bronfman’s private equity partners Thomas H. Lee Partners, Bain Capital and Providence Equity Partners an exit strategy if they want one.

IPO registration touted the fact that Bronfman and his team have been begun reversing the company’s financial misfortunes, even turning a profit after blistering losses. Warner Music made a net profit of $36 million on sales of $1.09 billion in the last quarter compared with year-earlier losses of $1.15 billion, according to the SEC filing.

Bronfman has moved quickly to restructure the music giant, laying off 20% of the workforce and promising to realize $250 million in savings annually. He’s also aggressively pursued new income sources from digital technologies.

‘Where’s the value?’

“They made the company look better through cost-cutting, but where’s the value? They haven’t conquered the problems facing the industry,” one entertainment exec said, echoing the concern of Wall Street analysts.

Some on the A&R side have complained that budget cuts have eroded Warner Music’s ability to sign and promote new talent. Company’s current CD sales dipped 2.4% to claim 13% of the marketplace last year.

Warner Music, which includes such labels as Atlantic, Elektra and Warner Bros. as well as Warner/Chappell Publishing, is home to high-profile artists including Green Day, Josh Groban, Linkin Park and Madonna.

In its SEC filing, Warner Music didn’t estimate how many shares or at what price it would offer its stock, nor was a date for the IPO set. Such details will emerge in later filings.

Warner Music declined comment Friday, citing the SEC-mandated “quiet period” leading up to an initial public offering.

IPOs not in style

With the high-tech bust, IPOs went decidedly out of fashion, though DreamWorks recently bucked fears when successfully launching an IPO of its animation unit.

Warner Music’s SEC filing said shareholders including Bronfman and his partners plan to sell stock in the IPO but didn’t provide further details.

Proceeds from the IPO will be earmarked to reduce its $2.5 billion debt load and for general corporate purposes.

One likely investor is Time Warner, which has the option of buying a 15% stake in Warner Music under the terms of last year’s sale deal. Time Warner’s exercise price would be 75% of the common stock price.

Analysts predict that Time Warner will indeed exercise that option as part of the IPO. As recently as last month, Time Warner chair-CEO Richard Parsons said he misses the music biz.

Last month — and just in time for the IPO — Warner Music tapped a veteran of the technology research and investment world, Michael D. Fleisher, to oversee all of the company’s finance functions, information technology and investor relations. Serving in the role of exec VP-chief financial officer, Fleisher reports directly to Bronfman.

At the same time, it saw a high-level defection when Les Bider said he would step down as chair-CEO of publishing operation Warner/Chappell Music.

Goldman, Sachs & Co. and Morgan Stanley will be joint global coordinators for the IPO. They also will be joint book-running managers along with Lehman Brothers, Merrill Lynch & Co. and Deutsche Bank Securities. Citigroup and Banc of America Securities will be joint lead managers.

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