Michael Jackson finds new fans in investors

By Adam Satariano, Bloomberg.com

Michael-Jackson--Album-CoversMichael Jackson, the Grateful Dead and “The Sound of Music” are finding new fans in pension funds, private equity and banks convinced that old hits will play on as technology expands the way people use music.

Competition is increasing for music publishing catalogs and the income they generate from stores, radio and Web play, ads and movies. Last month KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, bought a majority stake in Bertelsmann AG’s music-rights unit.

Unlike recorded music, publishing is buffered from falling CD sales by its more diverse revenue sources. Owners can earn cash returns of 7 percent to 20 percent or more a year, depending on the songs and how they’re marketed, investors and dealmakers say. Jackson’s June 25 death has heightened interest in his stake in a catalog that includes Beatles tracks.

“Music-publishing assets can be equivalent to great real- estate investments,” said John Frankenheimer, co-chairman of Loeb & Loeb, a Los Angeles-based law firm involved in several sales. “You have to do the analysis to understand the difference between prime beachfront property, a distressed asset with great potential and a run-down property.”

Publishers own rights to lyrics and melodies. The biggest owners continue to be record labels, such as Vivendi SA’s Universal Music Group and EMI Group Ltd. In addition to KKR, recent buyers have included private-equity firms Pegasus Capital Advisors LP and Spectrum Equity Investors, the Dutch pension fund Stichting Pensioenfonds ABP and Credit Suisse Group AG.

‘Conservative Investment’

“I view it as a very conservative investment,” said Rodney Cohen, co-managing partner at Pegasus Capital, a $2 billion fund with offices in New York. “They will always have value, and as long you buy properly you have a tremendous amount of downside protection and tremendous upside potential.”

Pegasus bought Spirit Music Group in April, gaining songs from the Grateful Dead, Elvis Presley, Frank Sinatra and Billie Holiday. Spectrum Equity’s holdings include Bug Music, which oversees roughly 250,000 copyrights.

Publishing isn’t risk free, said Donald Passman, an entertainment attorney with Gang, Tyre, Ramer & Brown Inc. in Beverly Hills, California. The health of the music industry, falling retail sales and smaller ad budgets contributed to a 40 percent to 50 percent drop in the value of publishers in the past five years, he said.

Skittish Business

“The music business is skittish, and there is a potential that income will drop for the next few years before the ship rights itself,” said Passman, author of “All You Need to Know About the Music Business.”

Falling values are attracting investors, Passman said.

KKR agreed to pay 250 million euros ($347 million) for the stake in Bertelsmann’s music-rights unit, said two people with knowledge of the situation.

The group clinched its first deal last month, buying Los Angeles-based Crosstown, owner of an 8,000-song catalog that includes Ricky Martin’s “Livin’ La Vida Loca” and Sheryl Crow’s “All I Wanna Do.” The seller was the investment arm of Minneapolis-based grain processor Cargill Inc.

“Our goal is to create a sizable new entrant in the music- publishing business over the next five years,” Philipp Freise, a KKR director responsible for European media investments, said in an interview. “We will compete against the incumbents.”

Jackson’s death has spurred interest in his stake in Sony/ATV Music Publishing, according to Rob Wiesenthal, chief financial officer of the Tokyo-based Sony’s U.S. unit.


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