Bronfman's Back and Warner's Got Him

Updated from 9:43 a.m.

Time Warner (TWX Quote - Cramer on TWX - Stock Picks) reached a deal Monday to sell its struggling Warner Music Group to an investor group led by wannabe media mogul Edgar Bronfman.

The $2.6 billion cash deal will put Warner Music in the hands of a group headed by Bronfman and funded by Thomas H. Lee Partners, Bain Capital and Providence Equity Partners. The Lee group said the deal will create "one of the world's largest independent music companies." Warner Music is the No. 4 player in the industry, with about 12% of the market and 2002 revenue of $4.2 billion.

Yet as the deal allows Time Warner to exit the problematic, revenue-shrinking task of operating a major music label, the transaction raises the question of what the new owners can do to fix the business that Time Warner and other label owners can't or won't do themselves, other than patiently ride out the ongoing decline in the music market.

"While we do not foresee an immediate upturn in the overall market for recorded music, we believe opportunities are emerging that bode well for the long-term future of the business and that Warner Music will continue to be in the forefront of capitalizing on these opportunities," said Thomas H. Lee managing director Scott Sperling in a statement. Warner Music's numerous recording artists include Madonna, Phish, Neil Young, and Missy Elliott.

Though one plausible strategy for the new owners is more ruthless cost-cutting than current owners might have had the stomach for, Warner Music's buyers didn't broach any specifics of their plans in the press release announcing the deal. When pressed for details on Monday, a spokesman for the buyers said only, "They'll be focused on profitably building the business and restoring it to pre-eminence in the music industry," laying to rest any fears that the Bronfman et al. were interested in building the business unprofitably or grooming it for failure.

Time Warner, which said any gain from the sale will be offset by operating and capital losses, took an option to buy back up to 15% of the business -- and under certain undisclosed circumstances, up to 19.9% -- "on favorable terms" within the next three years.

London-based EMI had been bidding for the Warner assets, according to published reports, but the company dropped out of the race this weekend.

The deal caps Bronfman's latest effort to score big in the media business. The executive built the Universal Music juggernaut in the 1990s while at Seagram, but then swapped that company for a raft of Vivendi (V Quote - Cramer on V - Stock Picks)stock just before the French media conglomerate's well-publicized swoon. The Warner Music group acquisition comes just six months after Bronfman said he was considering a run at some of the U.S. entertainment assets eventually snapped up by General Electric (GE Quote - Cramer on GE - Stock Picks).

Bronfman, according to the announcement, will be the most senior executive of the new company, which will retain the Warner Music Group name. Roger Ames, WMG's current chairman and CEO, indicated he would remain at the company. "I look forward to working with Edgar, as we strive to master the challenges our industry is facing," he stated in the release.

The parties also indicated that though WMG will be departing the Time Warner family, it will maintain certain business relationships with its soon-to-be former siblings. "Even with this sale, we look forward to continuing to work closely with Warner Music through a number of productive relationships involving our other divisions," Jeff Bewkes, chairman of Time Warner's entertainment & networks group, was quoted as saying.

WMG's Warner/Chappell Music publishing company administers copyrights for the Time Warner movie studios Warner Bros. and New Line Cinema, and it has first dibs ad releasing soundtracks for those studios' movies. Whether WMG will get special treatment in other areas -- say, promotion of its artists on Time Warner's America Online -- wasn't immediately clear.

The relaunch of Bronfman's media captaincy comes as the music business continues to flounder. Global music sales fell 17% from 1999 to 2002, and continued their slide this year, according the IFPI worldwide record industry trade group.

Competition remains fierce, as big players have continued to dominate the trade. Recent data indicate that the industry leaders -- Sony, Bertelsmann's BMG, Warner Music, EMI and Universal Music Group -- have an 83% share of the U.S. album market and a 75% of the worldwide market.

On Monday, Time Warner's shares rose 29 cents to $15.84.