dognovel Chapter 199 New Developments in the Music Sector
Chapter 199 New Developments in the Music Sector
Chapter 199 New Developments in the Music Sector
The air in the office relaxed as the Epstein issue was resolved. Ernst turned away from the light outside the window and changed the subject, asking about the thing that had been troubling him most recently.
"Any new developments from BMG?" His voice was steady, but he couldn't hide a hint of urgency.
BMG stands for Bertelsmann Music Group. At the time, Ernst asked MGM to contact them to see if there was a possibility of acquisition. Some time has passed, and we don't know what the situation is now.
Online music copyright is crucial to the extent that MGM's financing and IPO can reach, and this matter cannot be delayed for too long.
With so many music companies around the world, negotiating with each one would be a long and drawn-out battle. We can't just wait for Google Tunes to be delayed and wait for MGM, or when would that happen?
Ernst noticed the barely concealed joy that appeared on Robert Iger's face as he sat opposite him.
A glint of light flashed in his eyes; it seemed this matter had a chance.
"Bertelsmann just gave their official response a couple of days ago." Robert Iger leaned forward slightly, his tone tinged with excitement. "They do have a clear intention for MGM to acquire BMG, but there are two core conditions: they will not accept a full acquisition, nor will they approve of a pure cash transaction."
"What Bertelsmann wants is a stake in MGM?" Ernst asked, a hint of understanding in his voice.
In the realm of business mergers and acquisitions, equity swaps often signify a desire for long-term commitment rather than a cash-out exit.
"That's right." Robert Iger nodded solemnly, his fingers gently smoothing the wrinkles on his suit trousers, and further explained, "Bertelsmann Group is very interested in the global entertainment industry, but due to a lack of mature industry operation experience, it has never really ventured into this field."
"The essence of this equity acquisition proposal is to leverage MGM's mature system in the film and entertainment industry to achieve a breakthrough in its entertainment landscape and no longer limit itself to the music sector."
Ernst remained silent for a moment, his mind racing.
On the surface, Bertelsmann's demands seem to have increased the complexity of the acquisition, but this collaboration also holds immense value far beyond simply acquiring a music company.
Unlike financial investment institutions, Bertelsmann is a German giant with a strong presence in the global printing and publishing industry, which is precisely one of the core resources that MGM needs.
What does this mean? A never-ending stream of scripts.
If Bertelsmann were to acquire a stake in MGM, it would be a huge boost for MGM in terms of content creation and marketing.
First and foremost, it's about enriching the content ecosystem. Bertelsmann is one of the world's largest literature platforms, with many well-known brands such as Random House, bringing together a massive amount of works and reaching hundreds of millions of users.
The second point is the support for IP development and multi-business monetization. Bertelsmann owns a large number of popular IPs, and even if the other commercial rights of many IPs are held by the authors, Bertelsmann can still cooperate with these authors to develop them.
At that time, MGM will not only be able to use these IPs to develop film and television, but also adapt them into various other industries such as animation and games.
Finally, it helps MGM's business go global. It's worth noting that Bertelsmann's products are sold in more than 200 countries, and no Hollywood giant can compare to them in terms of distribution channels.
MGM could leverage the other party's channels to build an entertainment distribution empire of its own.
"What about the specific valuation and cooperation terms?" Ernst snapped out of his reverie and focused his gaze on the other party again.
Robert Iger did not answer immediately. Instead, he got up and walked to the filing cabinet behind him. After carefully searching through the pile of folders for a while, he pulled out a folder of moderate thickness.
On his way back to his seat, he opened the folder and took out the neatly organized negotiation minutes and financial statements.
"You can take a look at this document first." After sitting down again, he handed the document to Ernst.
Ernst took the document, first glancing up to meet Robert Iger's gaze, then lowering his head and quickly scanning the contents of the document.
He read extremely fast, but he didn't miss any key data. In just over ten minutes, he had basically grasped the core progress of the previous rounds of negotiations between the two sides.
Among the numerous pieces of information, Ernst remained most concerned with three core figures: MGM's valuation, BMG's valuation, and the equity swap ratio proposed by Bertelsmann.
Ernst glanced at the other person, then turned the light into his hand and began to scan it roughly.
A dozen minutes later, Ernst, who had put down the documents, had a basic grasp of the progress of the negotiations between the two sides, but Ernst was mainly concerned with a few numbers.
First, there's the valuation. Bertelsmann's latest valuation for MGM is $58 billion, which is still due to the recent huge success of "Titanic," which has significantly boosted MGM's brand value and market influence.
According to the data, in the second round of negotiations, Bertelsmann valued MGM at only $46 billion, which was exactly one week after the movie's release, a price lower than the $50.5 billion in the first round of negotiations.
Secondly, there's the valuation of BMG. Bertelsmann priced its music business segment at $12 billion, a figure far below Ernst's expectations.
It's worth noting that in today's US music market, even record companies smaller than BMG are often valued at $15 billion to $20 billion.
Ernst inwardly marveled at how meticulous German companies were in their valuations. Bertelsmann had not added any market bubble to either MGM or its own assets, a stark contrast to the high premiums often associated with American companies.
Finally, regarding the cooperation method, Bertelsmann proposed a combination of equity and cash acquisition.
MGM needs to use a 15% stake plus some cash to complete the acquisition of BMG.
Based on a valuation of $58 billion, a 15% stake would be worth approximately $8.7 million. Adding the $3.3 million in cash, the total acquisition cost would be exactly the same as BMG's valuation of $12 billion.
"15% equity is too much." Ernst put down the documents and tapped his fingers lightly on the armrest of the sofa.
"Perhaps we can consider another alternative proposed by them." Seeing Ernst's doubtful expression, Robert Egger immediately added, "This is a new proposal that Bertelsmann put forward on the spur of the moment when we spoke with senior executives two days ago, so it wasn't written down."
"Oh? Tell me about it." Ernst's interest was instantly piqued, and he gestured for the other to continue.
"MGM will acquire 51% of BMG's shares through a stock acquisition, and the two parties will sign a six-year cooperation agreement. After the six-year term expires, MGM will have the right of first refusal to acquire the remaining 49% of BMG's shares." Robert Iger explained the details of the plan in a steady and clear manner.
"However, there is an additional condition: Bertelsmann has the right to choose the transaction method for the acquisition of the remaining 49% of the shares. It can be a pure cash acquisition or a combination of equity and cash, but the equity portion cannot exceed 50%."
Ernst's fingers paused on his chin, gently stroking his clean-shaven stubble, a thoughtful glint in his eyes. "This suggestion is indeed quite interesting."
If MGM acquires 51% of the shares first, based on Bertelsmann's valuation of $12 billion, this stake would be worth approximately $6.12 million. If MGM could raise the price further, valuing the company at $6 billion, then it would only need to sell about 10% of its shares.
More importantly, there is the follow-up acquisition after the six-year period expires. Ernst is full of confidence in MGM's future. According to the current pace of development, MGM will definitely have completed its listing in six years, and it will be no problem for the company's market value to exceed $200 billion.
In contrast, the traditional music market is bound to decline as a whole due to the impact of digital music. Even if BMG's market value increases, it will be difficult to exceed $20 billion.
In this way, the remaining 49% equity stake in BGM would be worth approximately $9.8 million. Even if the acquisition were to be made through a combination of equity and cash, the equity stake paid would be at most 50%, meaning MGM would only have to pay $4.9 million, which would be only 2.45% of the equity stake in a company with a market capitalization of $200 billion.
This is still Ernst's worst-case scenario. If MGM's market value continues to rise in the future, BMG's market value will not reach $2 billion, and this percentage may even be less than 20%.
"Yes, the framework of this plan is feasible." Ernst nodded slowly, but then his tone became firm as he changed the subject. "However, Bertelsmann's valuation of MGM at $58 billion is definitely not acceptable."
In fact, Bertelsmann's valuation of MGM is more in line with MGM's current actual value, while Ernst's valuation of Wall Street is clearly a super premium.
The reason Ernst wasn't too bothered by the valuation was mainly because the valuation given to Bertelsmann Music Group by the other party wasn't high either.
However, the box office benefits of "Titanic" continue to be released, and MGM's brand value continues to rise.
"$61 billion, that's our bottom line." Ernst held up one finger, emphasizing each word: "Bertelsmann's stake in MGM must be reduced to below 10%."
"Should we put the announcement of the progress of the negotiations on the agenda?" Robert Iger thought for a moment. "Now is indeed the right time. Once news of MGM's acquisition of BMG breaks, the capital market will inevitably have optimistic expectations for MGM's valuation, which will be extremely beneficial to our financing negotiations with Wall Street."
The reason for choosing to conduct the negotiations in secret was precisely because of concerns about industry competition, which is because the record industry is currently too prosperous and wealthy.
If other record labels knew that Bertelsmann was interested in selling, they would definitely get involved, and their offers would be much better than MGM's.
However, it now seems that Bertelsmann is not only interested in collaborations in the music industry, but also in the entire entertainment industry, which is a testament to MGM's strengths.
By announcing the news now and raising MGM's valuation, Bertelsmann should be willing to concede on the valuation of a few hundred million dollars.
Once Bertelsmann and MGM reach an agreement, MGM's financing from Wall Street will reach a new level, and Bertelsmann, as one of MGM's major shareholders, will also benefit.