How Much is Warner Music Worth in a Bid? (WMG, AAPL)

In late-afternoon trading, shares of Warner Music Group Corp. (NYSE: WMG) are up by more than 12% at $7.77 on news that Ron Burkle is preparing a bid for the company.  What we are curious about is just what exactly this company would be worth or could be worth to an acquirer.

The figure thrown around by CNBC is $3 billion, but that figure obviously assumes the assumption of more than $1.9 billion in direct long-term debt. The market cap is currently $1.17 billion.

The 52-week trading range is $4.00 to $8.02 and it probably matters not that this was a $10 and $15 stock in 2007 and that it was worth $20 in 2006.  That was then.  The ‘now’ is a different world for music publishing.

Thomson Reuters has estimates for a loss at -$0.93 EPS in 2011 and -$0.91 EPS in 2012.  For revenues, the 2011 estimates are $2.69 billion and the 2012 estimates are $2.68 billion.  Making a calculation on a times-revenues basis is hard to have much faith in when losses prevail no matter what.

Most investors have moved on and forgotten about music publishers in the digital music world.  Apple Inc. (NASDAQ: AAPL) has changed the distribution model forever, while the production models have evolved all around with many musicians forming their own labels.  How many CD stores can you find in your city?  Probably not many.

The value here is likely in the library, but the goodwill on the books is at $1.066 billion and the intangible assets are listed as $1.192 billion.  The intangibles have been in decline for some time, while the goodwill has not changed much in recent years.

For whatever it is worth, Edgar Bronfman owns more than 6.8 million shares, Thomas H. Lee Partners owns some 55.555 million shares, and Bain Capital owns more than 24 million shares.  That is well over half of the shares. We are curious why there has been almost no options trading volume if a deal is really imminent.

Anything is possible.  We tend to be more conservative than most when it comes to valuing money-losing businesses that are in sectors where decline is the norm.  The old saying is that “Beauty (or value) is in the eye of the beholder.”  Maybe Ron Burkle can make chicken soup out of chicken mess.  He is braver than most.

JON C. OGG