Juicy details in Warner merger proxy…

May 23, 2011

When it comes to merger proxies, we’re just like Warren Buffett and love — and we do mean love — to read the “background of the deal”. So when Warner Music (WMG) filed its preliminary merger proxy late Friday, we immediately flipped to that section and were pretty surprised with some of the things we read.

For starters, we learned that discussions first began to heat up in the fall of last year — right around the time we told FootnotedPro subscribers that Warner looked like a good takeover target — about a “potential strategic transaction primarily focused on the Company’s music publishing business”. But at the same time that others were kicking Warner’s tires, the company also made an offer — in December 2010 — to acquire one of its “major competitors”. And then everyone went off to Mustique for the holidays — just to be clear, that part isn’t in the proxy, it’s just an educated guess — and returned to work in early January when the deal-making began in earnest. As the filing notes, on Jan. 14, Warner’s advisers — bankers at Goldman Sachs (GS) and the much-lesser known AGM Partners — contacted 70 potential bidders and distributed confidentiality agreements to 37 bidders. At least we think it’s 37, since the very next paragraph of the proxy says that agreements were signed with 27 parties. Whether it’s 27 or 37, it still seems like a recipe for a giant leak, which could explain why news about a potential deal began to trickle out.

By the end of February, 10 different bidders had submitted proposals to acquire the company, including Access Industries, which ultimately prevailed with its offer. In early April, 8 bidders submitted second-round bids. By the end of April, four bidders, including Access, were told to submit “their best and final proposal”. During that first week in May — the deal with Access was announced on May 6 — there was still quite a bit of negotiating going on. Over the weekend, the NY Post identified one of those other groups — possibly Bidder B in the proxy — as a consortium led by Sony Music and Ron Perelman.

All told, the background of the merger goes on for seven pages with various twists and turns. With so many different bidders to keep track of and confidentiality agreements to administer, you actually start to appreciate why I-bankers and deal lawyers are paid the big bucks.

Speaking of big bucks, Friday’s filing also has some goodies in it for Warner Chairman and CEO Edgar Bronfman Jr. who stands to make $21.7 million once the deal is complete. That’s in exchange for his “in the money options” and restricted shares. Vice Chairman Lyor Cohen stands to make about $12.6 million while two other top executives won’t even make $100K on the deal. Somewhat surprisingly, eight directors will collect nothing, which, if nothing else, makes it hard for plaintiff’s attorneys to argue that the directors were motivated by their own greed. Indeed, as the filing notes on pg. 40, of the $40.6 million that will be paid out, Bronfman Jr. stands to take more than half.

The whole filing, which weighs in at over 200 pages, including the appendices — makes for some interesting reading.

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