Music biz: Deal appeal?

Blue period in industry colors pact speculation

NEW YORK — It’s official: The showbiz gossip mill has generated deal rumors for all five major label groups. But what the execs inside those groups are now wondering is, who’s buying?

Reports last week that AOL Time Warner might unload its music unit to shear off some of its mountainous debtload capped a string of sale/spinoff/merger rumors that have circulated in the industry over the past few months.

Warner Music insiders reacted to the news with a weary shrug (“when you announce a $100 billion loss, everything’s for sale,” quipped one battle-hardened staffer). So did the rest of the music community, which has developed a well-honed sense of gallows humor amid tumbling record sales.

But the rash of deal speculation, which has also touched EMI, Universal Music, Sony Music and BMG at one point or another over the past year, begs a more practical question: What sane person would want to own a music company right now?

The business is facing one of its darkest hours. Global album sales over the past year are estimated to have fallen by almost 10%. Piracy — from millions of file-swappers to billions of bootleg CDs — is taking its toll, as is cannibalization from DVDs and vidgames.

Fishing for deals

Yet there have been talks at many levels in recent months with potential dealmakers, some of whom come from unlikely places.

One major-label exec says that smaller players — music entrepreneurs who have made large chunks of cash by selling their imprints off to the majors — are now using that cash to sniff around at the big boys themselves.

“The big conglomerates have their own problems right now,” the exec noted. “But there are a couple of smaller guys — not in the billions, but in the hundreds of millions — that are interested in taking their shot at the next level.”

Aside from the bargain prices to be had, buyers may be lured by the argument that the labels’ plight is at least partly of their own making; with a little savvy management and strategic vision, their fortunes could turn dramatically.

That’s not to say that the majors themselves aren’t in on the action. Given the lack of third-party buyers, many congloms have looked to each other as partners.

Troubled U.K. label group EMI has been on the block for years (past attempts at a deal have been blocked by European competition authorities), but rumors of a possible merger with BMG, Warner Music, or even another partner have heated up in recent weeks.

Meanwhile, Universal Music is caught up in the turmoil of its French parent, Vivendi Universal, which is looking to sell all of its entertainment assets to one of several potential suitors. Sony Music is perhaps the least touched by scuttlebutt of late, but recent rumblings on Wall Street of late have it that even Sony is playing with potential combinations.

That the industry slump has decimated the market value of all the majors could be either a help or a hindrance for dealmaking, insiders said. For example, an EMI-Warner tie-up was valued at $20 billion three years ago; now, EMI’s market cap alone is less than $2 billion.

That could be both a blessing and a curse for a would-be dealmaker. While well-funded buyers may be eager to capitalize on the majors’ misfortunes, the labels’ current owners are reluctant to sell at these rock-bottom prices.

Of course, some congloms may not have much choice. With some companies carrying debt levels well into 11 figures and the future of the record business perilously uncertain, there may be a fire sale on the way whether they like it or not.