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KKR has quietly got out of the music business. Deep down in a press release about Universal Music and little-known investor Dundee acquiring songs owned by the private equity group, it was put plainly: “KKR will exit [its music catalogue] Chord upon completion of the transaction”.
On the face of it, this looks like a dream pay-off for KKR. The company said in October 2021 it had bought more than 60,000 songs for $1.1bn, assigning the catalogue the cutesy name “Chord”. Now, KKR has sold Chord at a valuation that is 68 per cent higher at $1.85bn.
But this is not an apples-to-apples comparison. KKR stuffed Chord with additional music it had bought in the past few years — such as a majority stake in Ryan Tedder’s catalogue for a reported $200mn. It also bought stakes in ZZ Top’s music interests for $50mn and John Legend for an undisclosed sum. This would push the ostensible price-tag of the larger catalogue up significantly.
A KKR spokesperson said the firm had been very pleased with the portfolio’s strong performance over the last several years, which significantly surpassed original expectations. They added that the firm was not actively looking to exit Chord but UMG’s interest presented an exceptional opportunity to realise the value of KKR’s investment.
Nonetheless, KKR’s quick exit is a good example of how Wall Street’s high-profile push into music was far more nuanced than depicted in splashy announcements about billion-dollar sums during the low-interest-rate era.
When KKR announced it was establishing Chord in October 2021, they said the songs would be safely in the hands of “long-term owners who are deeply committed to respecting artists”.
As it turned out, the “long-term owner” of these songs was actually Dundee Partners, the family office of Stephen Hendel, a former Goldman Sachs banker who made a fortune in commodities trading and has always had an affection for music. Dundee had helped finance KKR’s 2021 acquisition.
But interest rates rose sharply after that, and the asset — which KKR had acquired via its private credit unit — became relatively less attractive. Higher rates depress the value of the future cash flows music owners expect to earn.
The Financial Times reported in December that KKR was looking at cashing out its music investment after receiving approaches. “They’ve obviously made a return on it. But the reality is that, they want out of it . . . ,” said a person who was directly involved in the negotiations.
With this deal, Universal gets control of the copyrights of one of its biggest stars — The Weeknd. It also gets the songwriting rights for Shellback, the Swedish producer who is one of the writers of Taylor Swift’s Red and 1989 albums. Universal also plans to use Chord as a financing vehicle to help pay for other catalogues it might want to buy in the future. Dundee will be looking for other family offices, and perhaps even sovereign wealth funds, to put money into the vehicle, according to people familiar with the matter.
This raises the question: why would Universal, a publicly traded company with a market value of some $50bn, partner up with a former energy trader to bankroll its acquisitions? One obvious answer is that the stock market might not react well to Universal splashing out billions on various song catalogues instead of, say, paying out dividends. With this arrangement, Universal gets to buy into music catalogues without spending too much of its own money, or inflating its balance sheet. Chord will take on any debt to do deals.
I’d posit an additional possible factor. Universal very much wants to be in the business of The Weeknd, Swift and other stars, and to control as much of their music as possible. And as a company that controls a third of all the world’s music, it might also be wary of raising antitrust concerns.
Under Tuesday’s agreement, Dundee will be the owner of more than 75 per cent of Chord, while Universal will hold a minority stake. Crucially, Universal will administer the songs. It gets to do so without formally owning the asset.
One test now for the music industry will be the interest in Queen’s music catalogue. The band has been speaking with potential buyers, including Universal, who had engaged in talks, according to people familiar with the matter. But ultimately, Universal let its exclusivity period expire because the price the band wanted was too high, these people said. And with KKR’s exit, there may now be one less buyer.
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