Taylor Swift dispute highlights music perils for private equity

When Big Machine Records, the owner of Taylor Swift’s back catalogue, was sold earlier this year, minority investor Carlyle Group declared that it had seen a “big shift” in the power of celebrities over consumers.

Carlyle had helped finance the $300m deal as part of a push to “capitalise on those macro industry trends”, Jay Sammons, its head of consumer, media and retail, said at the time.
But what one of the world’s largest private equity firms may not have anticipated when performing its due diligence was the less quantifiable factor in entertainment transactions: celebrity drama. 

The sale turned over control of the master recordings of six of Swift’s seven multi-platinum albums to Scooter Braun, a music mogul who has managed Kanye West and Ariana Grande and whom Swift views as her enemy. She claims Scott Borchetta, her former label manager and founder of Big Machine, blocked her from acquiring her own music catalogue and instead sold it to Braun’s Ithaca Holdings.

Swift also contends that both men attempted to prevent her from performing those old songs at Sunday’s American Music Awards.

In a post broadcast to her 200m social media followers last week, Swift asked for help to “talk some sense into the men who are exercising tyrannical control over someone who just wants to play the music she wrote”, and went on to mention the private equity firm by name.

“I’m especially asking for help from The Carlyle Group, who put up money for the sale of my music to these two men,” she said. Carlyle had been an investor in Ithaca Holdings since 2017, and provided additional equity this year for the $300m acquisition of Big Machine, giving it a “significant” minority stake in the company. 

‘The back catalogue moves every time she performs’

As streaming services help the music industry rebound from a 15-year slump, it has become attractive again to investors like Carlyle. TPG is an investor in Spotify, while Blackstone has bought two music licensing companies in recent years. Universal Music, Swift’s new record label, was recently valued at $33bn by Tencent.

An artist like Swift can generate revenue for decades as her songs continue to be used in television commercials and films, or streamed by fans. “The back catalogue moves every time she performs,” said one person with knowledge of her streaming numbers. 

However these investors might not be prepared for the high jinks of the entertainment industry, observers warn. “Carlyle would have hired a law firm to do all the due diligence, but did Carlyle know that there could be some backlash?” said a prominent banker who works on media transactions. “That’s the art form of these music deals: making sure that the ecosystem is stable and friendly. When you buy a music company that over-indexes on one particular artist, then you’re taking on more of that risk.”

Swift, who is known for being assertively outspoken, is a particularly risky proposition, and she is already using her clout in other ways to try to undermine the transaction. She has vowed to re-record her old albums next year, creating fresh versions of hits like “Blank Space” and “Love Story”, seeking to devalue the catalogue that Ithaca and Carlyle have acquired.

Any loss on the investment would not be a serious setback within the private equity group’s $220bn managed assets. However the transaction has brought Carlyle’s name into an unwanted spotlight, as left-leaning politicians Elizabeth Warren and Alexandria Ocasio-Cortez seized on the tussle to condemn Carlyle. Ms Warren cited Swift as “one of many whose work has been threatened by a private equity firm”, while AOC said Carlyle was holding the artist’s music “hostage”.

This has left Carlyle employees nervous and questioning internally how they got involved in the spat, according to people familiar with the matter. Other people close to the situation said that Mr Sammons’ team remains confident in the investment. Carlyle declined to comment, and Mr Sammons did not respond to requests for comment. 

‘This is a lawyer’s dream in fighting it out’

Perhaps the reason outside investors were blindsided is that this conflict is personal. Mr Borchetta signed Swift when she was a 15-year-old aspiring songwriter; Swift recently told Rolling Stone that she “legitimately thought [Borchetta] looked at me as the daughter he never had”. 

After years of decaying relations and months of negotiations, Swift finally left Big Machine last year and instead signed with Universal Music’s Republic Records in a deal estimated at more than $100m, which “hurt” Borchetta, said people close to him.

Mr Borchetta denied Swift’s claim that she was not given a fair chance to buy her masters back, and put Big Machine up for sale last October. Despite attracting bids from Swift’s new home, Universal, he opted to sell it to Mr Braun — igniting a fiery exchange between the parties when the deal broke in June. Swift’s lawyer replied that Mr Borchetta “never gave Taylor Swift an opportunity to purchase her masters, or label, outright with a cheque in the way he is now apparently doing for others”.

Tensions grew worse when Mr Borchetta recently told Swift’s team they would not grant further licences to use her music for various purposes, including the AMAs, unless they could reach agreements on other points, according to three people with knowledge of the meeting. Their requests: that Swift stop “slandering” them in the press; pay them $7m they claim she owed; and clarify her rumoured plans to re-record her catalogue.

In response, Swift doubled down on marshalling public pressure for her cause. Meanwhile Big Machine, which had initially denied blocking the AMAs performance, responded days later that they had since agreed to grant all licences related to the show, after facing an onslaught of criticism.

Swift’s bargaining chip is her threat to re-record her music. Big Machine earned about $40m in earnings before interest, tax, depreciation and amortisation last year, according to people briefed on the figures, and Swift’s catalogue is the company’s prized asset.

Re-recording is not unheard of; artists such as Prince and Def Leppard have done so in hopes of regaining control of their oeuvre from their record labels. But it would be unprecedented in the streaming era of music, says Michael Sukin, a longtime entertainment lawyer who has represented the estate of Elvis Presley.

It remains unclear how this will end, or whether there will be material damage to Carlyle’s investment. “This is a lawyer’s dream in fighting it out. This has become a race to the bottom in terms of financial resources and PR,” says one entertainment banker. 

People close to Big Machine say that “nobody feels good about a lawsuit”. Other sources familiar with the situation say that Mr Braun would be open to selling assets to Swift at “market value”. 

Meanwhile the fight remains bloody on social media, where Mr Braun claims that he is receiving death threats.

Swift is set to be honoured as “artist of the decade” at the event, where she is expected to use her speech to address the conflict over who gets to control her vast catalogue of iconic songs. But first, she’ll get to perform them.

Source: Financial Times

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