acquisitions

BMI’s October 2022 switch to operating as a for-profit company didn’t cause a big reaction in the music business until a July 2023 Reuters article about the company being put up for sale revealed that it had generated $147 million in earnings before interest, taxes, depreciation and amortization. Then the response was significant – and mostly negative. The fear was that profit would essentially come at the expense of royalty payouts.

Even so, BMI executives and other music business sources familiar with the way private equity funds think about business suggest that songwriters and executives should wait to see how the performance rights organization’s vision, backed by the right strategic partner — such as New Mountain Capital, with which BMI is negotiating — could help them.

BMI has said it is switching models and seeking a buyer in order to respond to a changing market. “We need to continue to invest in our business and explore new avenues for revenue generation,” CEO Mike O’Neill said in an Aug. 18 letter to creators groups that was shared with Billboard, “so we can continue to expand our distribution sources.”

To do that, while delivering the kind of growth a buyer will presumably want, BMI plans to explore new businesses to build a company that can operate at scale, and across national borders, more efficiently than it now does. The idea, according to sources inside and familiar with BMI, is to create a new interdependent royalty-collection ecosystem that will benefit BMI and its potential new owner, as well as its affiliates.

BMI is looking for “a partner who can help us take advantage of new opportunities and provide a new level of investment and technological expertise,” according to a Sept. 5 letter from O’Neill to creators groups published on BMI’s website. New Mountain Capital, which is in an exclusive period to negotiate a deal with the performance rights organization, could be such a partner, executives familiar with the private equity sector suggest, since the firm has a track record of investing in companies to help them achieve significant growth. Since its 1995 launch, New Mountain — which now oversees more than $35 billion in assets and funds — has acquired or founded more than 60 companies, without any going into bankruptcy and without missing an interest payment, according to the company.

In particular, sources familiar with New Mountain Capital point to its investment in Blue Yonder, a software company the private equity firm acquired for $565 million in 2010 and sold to Panasonic in 2021 for an enterprise value of $8.5 billion. The private equity firm, “through continued investment and improvement” helped grow it from a “somewhat sleepy niche company to being the 14th largest software company in the nation,” New Mountain Capital’s CEO Steve Klinsky wrote in the May-June 2022 issue of Harvard Business Review. “We offer the capabilities and access to capital that a large corporate parent would, without forcing companies to become part of a conglomerate culture. At the same time, we bring a fresh, entrepreneurial vision to strategy, talent, R&D, technology, and corporate alliances.”

Still, BMI has not specifically addressed many of the concerns raised by its switch to a for-profit model, which is why songwriters and publishers remain nervous. In fact, on Sept. 18 a letter signed by dozens of lawyers called on BMI to engage in open and honest conversations with affiliates, saying that the PRO owes them the responsibility to respond with “specificity and transparency.”

“I get it that some writers may have legitimate worries because in a vacuum there is not a clear picture of what such a deal could be and how it could be a positive for BMI,” says a veteran music business executive. “But a lot of people with their own interest have been spreading very negative spins with shrill voices that what BMI is doing will be bad for publishers and songwriters.”

In the case of New Mountain Capital, the executive says, they “are nice, smart people” that help businesses add new processes to help them grow substantially and become even more profitable. New Mountain Capital has been studying the music industry for a few years and looked at some substantial deals, sources say, but so far has passed on them until now.

“There is so much negativity out there that doesn’t give this deal the benefit of the doubt,” says another executive. “New Mountain Capital are not corporate raiders; they are intelligent and love the business and want to grow the revenue base so that publishers and writers will be making more money and still make a profit for BMI.”

That’s exactly the kind of approach BMI is looking for, according to executives familiar with its strategy. In its first year as a for-profit business, for example, BMI announced a partnership with the United Arab Emirates company Music Nation to try to establish a public performance licensing and royalty infrastructure there. BMI has also undertaken an “extensive customer service initiative” to enhance the service it provides to affiliates, with plans for an improved online service portal to follow.

The company has said that its move to a for-profit model made these investments possible. But one music publishing executive, who requested anonymity, wonders “why is it easier to invest in systems upgrades as a for-profit entity rather than as a not-for-profit organization?” One answer: The level of investment would impact distributions to affiliates under the previous not-for-profit system.

Publishing executives also believe that growing outside the U.S. will become a priority for BMI. Most of the growth for royalty collections is now coming from the growth of streaming services, and most of that will be international. Over the past decade, some of the European collective management organizations teamed much with publishers to license repertoire for online purposes across Europe, as European law allows. Such a model could also work in other territories, such as Latin America, Asia, or even the Middle East.

Given the opportunity for BMI outside the U.S., another executive wonders if it could be the first organization to try to rollout a global model, with a global membership. And if so, whether that would re-ignite competition to sign writers around the world.

Meanwhile, some executives speculate about whether New Mountain might be frightened off by the antitrust consent decree under which BMI operates, but “they understand deeply what that means,” says a source familiar with the fund, “and that it is baked into the business.”

Private equity is known for growing profits, not restraining them, but sources familiar with BMI’s thinking say that potential suitors need to understand that the company will prioritize payouts. In fact, a potential deal would not involve an expectation of “insane margins,” says one music industry executive who has worked with private equity. If a sale takes place, said O’Neill in an Aug 19 letter, BMI “would ensure that any partner embraces our mission of prioritizing the interests of songwriters, including their financial success.”

For-profit, for whom?

It’s “easy to assume that if we kept doing business the way we always had, distributions would continue to grow,” O’Neill wrote in his Sept. 5 letter posted on the company’s website. “That is a dangerous assumption to make, because in an evolving industry like ours, you run the risk of settling for a larger slice of a shrinking pie. Our goal is to grow that pie to your benefit.”

So far, in the three quarterly distributions since BMI announced its shift to a for-profit model, combined payouts were 9% greater than the same periods of the previous year. That’s almost as good as the 10.2% increase to $1.471 billion that BMI distributed in the fiscal year ended June 30, 2022, when overall revenue grew 15.6% to $1.573 billion, when it was still operating as a non-profit. (BMI is not releasing how much distributions increased for the full year ended June 30, 2023, and it will no longer release any company-wide revenue results, sources say. Instead, it will provide more information to songwriters and publishers to help them measure BMI’s payments in comparison to the past, and in some cases, if songwriters so request, to other PROs.)

Some songwriters and executives argue that, if BMI is sold, affiliates deserve some of the revenue from that sale. But as one industry executive familiar with private equity points out, it’s actually surprising that BMI’s owners – radio and television stations – didn’t sell it a long time ago.

“For over 80 years, you have had owners — all for-profit companies with their own businesses — and yet they didn’t make any profit on BMI,” that executive says. “And I guess it would be unseemly for them to pull dividends out at the same time they are paying licensing fees.” At the same time, he adds, those owners had to watch SESAC and GMR come along and build very profitable businesses.

SESAC, which is considerably smaller than BMI, was sold to the private equity firm Blackstone for about $1 billion in 2017. Ironically, at the end of 2018, one of Blackstone’s investment funds acquired a passive minority equity stake in New Mountain Capital, a fact that U.S. regulators could look at, if New Mountain Capital moves forward with its BMI acquisition.

“The fact is that the broadcasters own BMI; and they are entitled to sell it,” the executive says. “I understand that the music industry likes the status quo, but if you start with the premise that the owners will sell, then you would want them to sell it to someone who is decent and understands the industry. It’s not smart to push [New Mountain Capital] away with a big outcry, because you don’t know who will come along next.”

There is also the potential for BMI to grow into a more modern company in a way that benefits the entire industry, the source says. “Take a year or two and see how things roll forward and how things shake out. If [BMI] songwriters are happy, then they can stay; and if not, then they can look to make a move.”