With big labels, other sectors down, big money hears call of Music ...

Kenny Chesney (Photo: Rusty Russell / File / Getty Images)

Los Angeles investor Ron Burkle has made billions in leveraged buyouts of supermarket chains and on a diverse portfolio of investments, including pro hockey?s Pittsburgh Penguins and clothing retailer Barneys New York.

Now, Burkle is turning his attention ? and his $30 billion private equity firm, The Yucaipa Cos. ? to Nashville?s country music industry.

This week, company executives will head to Nashville on a fact-finding trip that involves meetings with ?top managers, record executives and agents who represent some of the biggest stars in Nashville so we can get a better understanding of where we might fit in the country music scene,? said Rick Stevens, CEO of Burkle?s newly created music investment subsidiary, Y Entertainment Group.

?With the fundamental changes in the music industry, we believe there?s a great opportunity for a handful of well-financed players to come in and be the impetus for the future,? Stevens said.

Burkle is far from the only wealthy investor showing interest in Nashville?s music business ? which this week is on star-studded display as tens of thousands of fans converge at the annual four-day CMA Music Festival starting Thursday.

Analysts say the convergence of two key economic trends is making this an opportune time to invest in Nashville?s signature industry:

First, music companies, which have seen revenues drop in the digital music era, may have neared bottom, creating a sweet spot for fresh investors ready to ride what they hope will be a less risky business sector back to profits.

Second, weak returns in other business sectors have left some investors casting around for novel investment opportunities that could bear sweeter fruit, said John Frankenheimer, partner and chairman emeritus with theLos Angeles-based Loeb & Loeb law firm.

?There?s not a good opportunity to put money into bonds and get the returns. Real estate is choppy, and pricing is a challenge. The stock market in the past decade has been incredibly volatile,? Frankenheimer said.

?Investors are looking for a business they can get into and bring their professional discipline, then exit when it?s worth 2? times that. The music industry can be the type of opportunity for them, particularly when you see the growth opportunities for digital.?

Frankenheimer?s firm handled perhaps the biggest single private-equity transaction in the music industry in the past year, representing Warner Music Group in its$3.3 billion sale to Russian-born oil billionaire Len Blavatnik and his firm, Access Industries.

The purchase gave Blavatnik ownership of longtime Nashville subsidiary Warner Music Nashville, which represents Faith Hill, Dwight Yoakam, Big & Rich and Randy Travis, among others.

Sale was catalyst
Warner?s sale served as a catalyst for Burkle?s interest in music, Stevens said.

Yucaipa was one of the original bidders on Warner Music Group.

Although the company later withdrew its bid, the process of conducting due diligence for a possible purchase of Warner educated executives about the industry?s prospects.

?We came to the realization that a better course of action would be to build our own entity from scratch by building our own group of companies, each of which had a specialty in the business,? Stevens said.

This year the company purchased AGI, the New York-based concert-booking agency.

Nashville?s music scene represents ?probably the most consistent area once success is established in terms of consistency of record sales, loyalty of fans that?s unique in the entertainment business,? Stevens said. He will be in town for a two-day, behind-the-scenes business meeting called the Country Music Summit, which has for the past three years come right before fan-focused CMA events.

The local music industry is also attracting other interest.

Bigger Picture Group was launched in Nashville in 2008 as a subsidiary of a newly formed Pennsylvania company, Red Stripe Plane Group, which has interests in casinos, night clubs and technology.

The company was founded by mergers and acquisitions expert Gary Veloric, whose other interests include a financial services company and the health-care industry.

Bigger Picture consists of an independent record label whose roster includes successful country performers such as the Zac Brown Band, which it handles in partnership with Atlantic Records, and Craig Campbell. It has a music publishing arm called Songs of Bigger Picture that has cuts by country music artists Miranda Lambert, Reba McEntire, Brad Paisley and Kenny Chesney. And it has a sister company called Idea Den that provides digital services.

David Robkin, the Philadelphia-based CEO who commutes to Nashville to run the company, said the disruption in the music industry was what drew the investment.

?In disruption, things take place,? Robkin said. ?And particularly because of the digital evolution, we think that?s a tremendous opportunity for growth.

There?s also an opportunity to start fresh with a clean-slate business.

?The legacy companies have been burdened with their cost structure and payroll structure,? Robkin said. ?We really started with a white sheet of paper and the opportunity to be creative and efficient.?

The business model is based on creating new joint ventures with each artist, often 50-50 partnerships, in which the company brings the capital needed to launch the artist?s career with recording, promoting, touring and publishing.

Country music has a special attraction to investors, said Robkin, whose varied background includes finance and rock music.

?The timing is getting even better for country music,? he said. ?The audience is growing. It?s not limited to the South anymore. It?s less country western and perhaps more country pop, country rock. That makes it more accessible.

?The tremendous success of all the country awards shows on television is another signal. I started noticing that when Kenny Chesney came to Philadelphia he was playing in front of 45,000 people. He was sold out. At the time, I was like, ?Who is he?? The format just keeps getting bigger, and that?s really exciting to investors.?

Sweeter returns
Robkin said his company expects its investment to bring ?venture-sized? returns, which he said could be 25 percent, 30 percent or better.

One key to success is bringing aboard experienced industry professionals.

Music Row pros Keith Stegall, a former Mercury Nashville A&R executive and a producer and songwriter best known for his work with Alan Jackson; and Michael Powers, former senior vice president of promotion for Universal Records South, are part of Robkin?s crew.

But front-end investments in music should not be underestimated, and the time required to see returns won?t necessarily be short, investors say.

?The truth is to be involved in the country music business does take substantial capital,? Robkin said. ?The nature of country music is still so dependent on country radio, so you need to have the infrastructure and capital to promote your artists. The price of entry into country music is steep.?

Benny Brown, a California car dealer and entrepreneur who started Broken Bow Records, one of the few surviving independent labels that launched in the 1990s, has said it took nearly six years of substantial cash losses before that company started making money with stars such as Jason Aldean and Craig Morgan.

And industry veteran Joe Galante, former chairman of Sony Music Nashville, strikes a cautionary note as well.

?I don?t think people should operate under the assumption that private equity is apparent in a big way in Nashville,? Galante said. ?There?s some opportunity in terms of investment, but there are also people who have invested in labels who?ve gotten their butts kicked.?

?With private equity money coming in, or venture money coming in, you aren?t seeing the kind of returns that you might see in the digital space or in health care,? he said. ?Getting half a million (dollars)? OK. But it?s not tens of millions.?

More potentially lucrative than record labels, Galante adds, are artist management ventures or digital startups.

Who has money?
Frankenheimer, the Los Angeles attorney who has negotiated private equity takeovers of music companies, said the industry will probably continue to draw two types of interested investors.

Those interested in startups can find opportunities in the music sector and build a company to scale. They?re more likely to be drawn by the cachet the industry provides.

?It?s emotional for some investors who are drawn for the same reasons they might be drawn to sports franchises,? Frankenheimer said.

Those interested in buying existing companies are an entirely different breed.

?They?re going to be analyzing the numbers closely, looking at the cash flow, rationalizing the overhead against the cash flow and trying to build a business that makes sense either by size or as part of a roll-up strategy. (That means) buying smaller businesses and streamlining them in a group with some sort of unified backroom oversight,? the attorney said.

Most transactions aren?t going to be on the scale of the billions of dollars required to buy a major record label.

But private equity firms and venture capitalists are interested in the next wave of startup independent labels, which over the past few years have led to some of the music industry?s top success stories, including artists such as Taylor Swift, Adele and Mumford & Sons.

Does the money behind the label affect the music?

?Motown was driven by its own vision, not investors,? Frankenheimer said. ?It?s nice to find a balance between visionaries who can also access capital and build those companies. That?s where we might be right now.?

? Anita Wadhwani
The Tennessean

Contact Anita Wadhwani at 615-259-8092 or awadhwani@tennessean.com.

The players
Ron Burkle
Made billions on buyouts of supermarket chains. Has stakes in Pittsburgh Penguins and clothing company.
Bought concert promoter Artist Group International.
Looking to invest in country music industry

Len Blavatnik
Russian-born oil magnate.
Bought Warner Music Group for $3.3 billion.
Clients of Nashville subsidiary Warner Music Nashville include Faith Hill, Dwight Yoakam, Big & Rich, Randy Travis.

Gary Veloric
Mergers and acquisitions expert with interests in casinos, financial services, health care.
Launched Bigger Picture Group in 2008.
Clients include Zac Brown Band and Craig Campbell.

Benny Brown
Car dealer and entrepreneur.
Started Broken Bow Records.
Clients include Jason Aldean and Craig Morgan.

Country Music Summit
A two-day business conference sponsored by Billboard and the CMA Country Music Association.
When: Monday and Tuesday, beginning at 8 a.m.
Where: Cannery Ballroom, 1 Cannery Row, Nashville
Highlights: David Robkin, CEO, Bigger Picture Group, and Rick Stevens, CEO, Y Entertainment Group LLC, are among the panelists for ?Follow the Money: Who is Investing in Country Music & Where,? which begins at 11:15 a.m. Monday.
Other panels: Speakers include performers Dwight Yoakam, Willie Nelson and Luke Bryan. Other panels feature executives from radio, record labels, music publishers, artist management and other music disciplines.
To register, or for more information, see billboardevents.com/country.
? Anita Wadhwani

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