Warner Music IPO aims to strike a chord in ‘Six Feet Apart’ era

New York: Warner Music Group Inc is hoping to strike a stronger chord on Wall Street as the company that represents musicians including Lizzo and Ed Sheeran readies for its public debut.

When Warner Music filed to go public in early February, its equity story was wrapped up in music streaming as a key source of revenue. Now, after the coronavirus has left many homebound and looking for entertainment, that theme could register even further with investors.

“We’re seeing how vital and important music is to people’s daily lives,” Warner Chief Executive Officer Stephen Cooper said in an earnings call in May. “Music lifts people’s spirits, transports them and makes them feel connected and safe.”

Similar to the way a simple walk outside has recaptured mass appreciation amid social-distancing mandates, Warner’s content both new and nostalgic could see renewed attention. And Warner appears to understand that.

During its earnings call, Warner noted music’s ability to resonate with consumers, touting songwriter Alec Benjamin’s “Six Feet Apart,” a song about social distancing that dropped at the height of pandemic concerns. The company’s roadshow presentation has also included screenshots of quarantine concerts streamed on Instagram Live, as well as popular clips on TikTok. “That’s a view of the depth of their distribution,” said MKM Partners analyst Rohit Kulkarni.

Music streaming platforms figure prominently in Warner’s sales, with Spotify and Apple accounting for 27% of its $4.5 billion in revenue for the fiscal year ended in September, filings show. But by demonstrating the different ways music content is being consumed — in lip-synchs, coordinated dancing, skate videos, and live concerts from artists’ homes — Warner is showing other potential avenues for distribution too.

Music streaming is Warner’s “fastest growing line-item” by far, but the rate of growth is decelerating, said Sanford C. Bernstein analyst Todd Juenger in a report published Tuesday. The record label’s net-net revenue share is expected to be stable over time, with the research firm’s view on Spotify’s sales projections serving as a proxy for the overall streaming industry.

The scarcity of pure-play music content investments bodes well for Warner’s IPO, both analysts said in their respective reports. And we know what scarcity did for the price of toilet paper. Yet scarcity can cut both ways. The combination of what Tencent Holdings Ltd. paid for a stake in Universal Music Group — which investors “unanimously characterised to us as a very high absolute multiple” — coupled with Warner’s unique business proposition, could lead some investors to fear Warner’s valuation will be too rich for them, Juenger said.

Warner’s IPO, expected next week, will test that sentiment. If Cooper’s observation of the company’s Artists & Repertoire team applies — that “great talent always rises to the occasion in good times and bad” — then there’s little to worry about.