Warner Music Cuts IPO Price

The much-anticipated initial public stock offering of Warner Music Group Corp. hit a sour note Tuesday as the company was forced to sharply reduce the share price to attract wary investors.

Warner priced its shares at $17 apiece, more than 20% below the $22-to-$24-a-share range it had hoped for.

Although the company sold more shares than it had projected -- 32.6 million instead of 27 million -- the cut in the price pared the total amount raised to $554 million, about $100 million less than hoped.

What’s more, the company’s owners gave up plans to sell 5.4 million of their shares so that Warner could sell more.

The moves reflect weak demand for the stock amid concerns that digital piracy continues to beguile the industry, and a sign of investor discontent over the sums pocketed by company insiders, including Chief Executive Edgar Bronfman Jr. and private equity firm Thomas H. Lee Partners, analysts said.

“This shows a serious concern with the health of the music industry,” said Richard Greenfield, Fulcrum Global Partners’ managing director. “Warner struggled to get this deal done, and they could only do it after a 26% haircut.”

Shares of Warner -- home to stars such as Madonna, Metallica and Green Day -- begin trading today on the New York Stock Exchange under the ticker symbol WMG.

The stock offering of 32.6 million shares at $17 each valued the industry’s fourth-largest music concern at $2.4 billion. Goldman Sachs Group was the deal’s lead underwriter.

Analysts began complaining about the offering last month after SEC filings revealed that more than $200 million of the total proceeds were earmarked for insiders, and that only about $7 million would be available for corporate uses. Analysts at Fulcrum and Sanford C. Bernstein & Co. issued reports this month saying the offering was too expensive at prices greater than $20 a share.

“The private equity guys only want to play in rigged games,” said David Menlow of research company IPO Financial Network. “They force companies like Warner to take on enormous debt and then shift that risk to public investors while walking away with the rewards.”

Similar concerns were voiced last week when one of Warner’s biggest acts, Los Angeles rap-metal band Linkin Park, questioned whether the IPO would interfere with the company’s ability to market albums.

Warner said that the band’s complaints were a negotiation ploy for a new contract.

The debt Warner took on during the Bronfman-led buyout should give investors pause, analysts said. The debt has ballooned to $2.26 billion from about $132 million before the March 2004 deal.

“It’s frightening that Warner had to create an entire section of their prospectus to warn investors about risks related to the company’s high debt,” said Menlow.

Warner’s private equity owners, which include Bain Capital and Providence Equity Partners, scrapped plans Tuesday to sell 5.4 million shares in the IPO.

Once part of industry giant Time Warner Inc., Warner Music was sold for $2.6 billion to a group led by Bronfman, heir to the Seagram spirits fortune who once controlled Universal Music. The group immediately reorganized the company by taking on more than $2 billion in debt, firing more than 1,000 employees, dropping 30% of the company’s artists and cutting budgets for signing new artists and songwriters.

The moves allowed the owners to recoup their cash investment within 10 months by paying themselves special fees and dividends. But the changes also drew criticism from former employees and industry experts who said the company was being managed for short-term returns.

Some analysts believe a depressed stock market is more to blame for Warner’s disappointing debut.

“These guys are suffering because their timing is bad,” said Bishop Cheen, a bond analyst at Wachovia Securities Inc. “But there is momentum in the music business right now. So Warner decided to take advantage of that because they know that stocks are like hair: Give it time and it grows.”

Others think the Bronfman group is getting a bad rap.

Strauss Zelnick, chief executive of ZelnickMedia and previous head of music giant BMG Entertainment, credits the Warner owners for having “turned around a company that everyone thought was in a dying industry. Their business is buying private companies and then exiting when they go public. If they wanted to own publicly traded stocks, they would be stockbrokers.”