EMI owner Terra Firma released its annual report today. Click here to download the 115-page PDF (the EMI section of the report starts on page 45) or here for a Reuters article.

EMI’s EBITDA was £221 million for the last nine months of 2008. That compares well to the £90 million of EBITDA recorded in the last nine months of 2007. Recorded music gross margin (sales less cost of goods) was £250.4 million, up 30.5% versus last year, and earnings were up £92 million. Recorded music overheads and other costs decreased 13.3% to £216 million .Music publishing revenue was up 0.4% to £307 million.

In a costly admission of both EMI and the economy’s outlook, Terra Firma wrote off half its 2.6-billion-Euro investment in EMI. In explaining private equity valuations (page 17), Terra Firma said it is a combination of portfolio financial performance and the application of a multiple or discount rate to comparable listed companies. As the valuation of public companies has declined, said the report, private equity firms’ higher amounts of leverage have magnified their declines.

Throughout the report, Terra Firma underlines the value it brings to its firms. Here’s a blurb:

Working alongside management, we overhaul the business both strategically and operationally. This often involves introducing new initiatives, processes and procedures in order to change the behaviour and culture of a company. This type of change takes time, but a long-term approach to investment is vital in order to create successful, sustainable businesses.

Cleaning up EMI has certainly improved its current financials. It has a more orderly organizational structure and more sound expenses and oversight. But media companies have problems that go well beyond processes, procedures or management.

As seen in the acquisition activity of Universal Music Group and Warner Music Group, as well as the merger of Front Line and Live Nation, one popular vision of the future music company puts more emphasis on artist services (management, agencies, e-commerce) and less dependence on revenues derived from assets (sound recordings and compositions, although music publishing is universally seen as a safer investment than recorded music). This vision recognizes that even the most well managed media company will have difficulties as technology changes how consumers acquire and enjoy their products.

Terra Firma, on the other hand, has put a great deal of its focus on organizational and structural elements tied to EMI’s legacy as a creator, marketer and seller of (hopefully) hit albums. Altering how tasks are carried out will allow EMI to cut 1,500 to 2,000 jobs.

Terra Firma does mention, without detail, a strategy that looks beyond monetizing sound recording and publishing assets. On page 48 it mentions the need to gain “touring, licensing and other revenue streams” (presumably in the context of multi-rights deals, not M&A activity). On page 84, the report outlines some strategic changes being made at EMI. The company’s future growth, judging from items highlighted here, are bundled subscriptions plans, mobile, gaming, advertising and sponsorships, and multi-rights artist contracts that peel off ticketing, touring and merchandise revenue.

Companies with less need for operational improvements have been looking beyond recorded music and publishing. Vivendi, parent company of UMG, saw a future in gaming and acquired Activision while UMG acquired Sanctuary. Warner Music Group sees a future in artist services and has moved into management, tour promotion and booking.

EMI’s growth segments will be their competitors’ growth segments. It will license music to the same stores and services. As the market ebbs and flows, only market share will set apart these companies. Once it achieves its desired operational and organizational efficiencies, then what? Terra Firma has spent time straightening up EMI — and rightly so — but has not looked far beyond being a consumer product and licensing company. This new annual report, like the Maltby Report before it, does not give any indication that Terra Firma is seriously looking beyond recorded music and publishing. To properly rebuild EMI, it may need to do just that.


Source: http://www.coolfer.com/blog/archives/2009/03/terra_firma_ann.php

Posted by: Amy Sikkes