Warner Music Group Shares Popped: What You Need to Know (WMG)

Warner Music Group Shares Popped: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of music publisher Warner Music Group (NYSE: WMG ) scored a hit today, jumping as much as 16% on tremendous trading volume.

So what: German media outlet Handelsblatt says that European music giant Bertelsmann and American buyout gurus Kohlberg Kravis Roberts & Co. (NYSE: KFN ) are ready to buy Warner Music for as much as $3 billion. Before jumping to euphoric conclusions about the tripling of a $1 billion market cap, you need to adjust that value for a heavy debt load and lack of cash: Warner Music's enterprise value now stands at $2.5 billion, all things considered.

Now what: The German newspaper says that KKR and Bertelsmann would dump some of the company's assets after closing the deal and then focus on running a profitable music publishing business. Collecting royalties on the intellectual property of musical works is a high-margin business, while selling recorded music is a less attractive business even when using digital channels with low overhead such as the Amazon.com MP3 store or Apple iTunes. It's a brave new world for artists and composers, and consolidation of the big music studios is a natural coping mechanism.

Interested in more info on Warner Music Group? Add it to your watchlist.

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