Analyst: Big Labels, Warner Music (WMG) In Death Spiral

Pali Research’s Rich Greenfield beat up Warner Music Group (WMG) on Thursday, putting a “sell” (registration required) and a $7.50 target on the shares, now trading at $10. Professional angry dude Bob Lefsetz uses the note to go on a “music’s got to be free” rant that he sent out via email last night, well worth reading whenever he posts on his site.

Separately, we’re also struck by Greenfield’s prognostication that WMG’s private equity owners (Tom Lee, Bain, Providence) will be bailing on the stock any day now. His logic:

• EMI, Warner’s natural buyer/partner, is in no position to absorb a big deal now.
• WMG may have to cut back its dividend just to keep the lights on.
• The PE guys have already extracted their initial investment and they’ve been at this for nearly four years.

Which brings us back to a recurring question: If WMG is in this kind of shape, what was on Terra Firma’s mind when it purchased EMI for $5 billion? EMI has less exposure to the U.S., which will help it when big box retailers cut their CD space in the coming months, but beyond that, the two companies have similar financials. 

Investors are currently valuing WMG at $1.5 billion. Greenfield makes a compelling argument that its market cap could drop another 25%, at least.

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