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Apple Looks to Regain Rhythm in Music Business

Stocks in this article: AAPL P UBS

NEW YORK (The Deal) -- Apple (AAPL)'s long-rumored acquisition of Dr. Dre's Beats Electronics and its Beats Music subsidiary is official. The $3 billion purchase, announced after the bell on Wednesday, includes the headphones and nascent music streaming service.

The transaction provides Apple CEO Tim Cook flashy products to show off at the company's annual Worldwide Developers Conference in San Francisco next week.

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Apple is acquiring a line of trendy accessories for iPhones, but UBS  (UBS) analyst Steven Milunovich suggested that Beats' streaming music service is the main attraction. "Apple touts Beats as best in class with a combination of algorithmic and human curation that is the future," Milunovich wrote in a Thursday note, suggesting that the deal is a defensive move to counteract weak downloads of songs through iTunes.

"Catching up to Spotify and Pandora Media (P) is a tall order," Milunovich wrote. "Apple may have concluded that it needed a separate brand and approach."

Macquarie Capital analyst Ben Schachter called Beats an "un-Apple-like acquisition" in a research note.

"We understand that music is important to Apple's DNA/culture but we believe that $3 billion could have been better spent on directly acquiring exclusive rights to key music libraries while also hiring key talent," Schachter wrote. The analyst suggested that Apple could have targeted a range of content "including games, video, sports rights, productivity apps, healthcare apps or any number of other key verticals that could help drive the ecosystem."

Apple will also gain a high-powered music industry dealmaker, as Beats co-founder and Interscope Geffen A&M Records chairman Jimmy Iovine will join the company.

Apple did not say whether the payment is in cash, stock or a mix. It did say the initial purchase price is $2.6 billion with the remaining $400 million slated to vest over time. UBS projects that the price comes to two times 2014 sales.

The price was previously rumored to be $3.2 billion in early May. The deal was slow to materialize, though there were public signals that a transaction was in the works. Dr. Dre boasted in a video posted online that he would be the first hip-hop billionaire earlier in the month.

Kyle Krpata of Weil Gotshal & Manges led a team advising Apple. Kevin Masuda headed a Munger, Tolles & Olson team advising Beats Electronics, while Beats Music received counsel from a team from Munger, Tolles led by Brett Rodda.

Jimmy Iovine and Dr. Dre retained Skadden, Arps, Slate, Meagher & Flom lawyers including Brian McCarthy.

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