By Luis Felipe Catão, Co-President of the King’s College London Mergers & Acquisitions Society
Deal Background
At the beginning of 2021, Sony announced that it had reached a provisional agreement to purchase the up-and-coming record label, AWAL, in a deal estimated at $430m. The British company, also known as “Artists Without a Label”, offers independent musicians a different pathway to stardom. Typically, a record label and artist enter an exclusive recording contract (ERA). This agreement gives the record label an exclusive right to record, market and distribute audio recordings featuring works of the artist. In exchange, the record label puts the music of the signed artists in the hands of millions of consumers through their distribution networks.
AWAL offers an alternative to this traditional model of music label deals, targeted at the so-called DIY artists: musicians who write, record and produce their own songs. Although these artists do not need a music label to record and dictate the terms of their music, they lack the means to market their creations. That’s where AWAL enters. In exchange for 10-30% of revenue, the company offers to use its connections to distribute the artists’ work. This deal avoids long-term ERAs and allows DIY artists to own their work, keep creative control, and take home the lion’s share of the revenue.
The deal poses significant benefits for Sony. Firstly, if the pandemic has shown anything to the music industry, it is that good music can be made independently – something evinced by a billion-dollar valuation of the DIY music industry. Thus, the deal allows the company to establish itself in a promising market that is currently dominated by other players such as UnitedMasters, CD Baby and DistroKid. Additionally, Sony will be able to use AWAL’s streaming data to get valuable insights on unsigned artists. Now with AWAL, Sony can capitalise on the success of some of the world’s most trendy artists, such as Madison Beer and Finneas.
The Deal
On 18 May 2021, Sony acquired all of the issued shares of AWAL from Kobalt Music Limited for a total of £314m through its wholly-owned subsidiary Sony Music Entertainment (SME). SME is an American multinational music company.
Competition Concerns
The deal has not been without challenges. Following Sony’s purchase of AWAL’s issued shares, the Competition and Markets Authority (CMA) launched a Phase 1 investigation of the deal on 7 September. At this point, the CMA determines whether it believes that the acquisition results in a realistic prospect of a substantial lessening of competition (SLC). In the case of a horizontal acquisition – where both companies operate in the same industry – such as the one at hand, an SLC would occur if the merged entity could be deemed to have a significant market share to raise prices or degrade non-price aspects of its competitive offerings.
The CMA found that the acquisition would remove the possibility of healthy competition in the music industry, especially in the DIY space. This was firstly motivated by AWAL’s innovative business model, having been one of a handful of small suppliers that gained a foothold in the major label market. Secondly, it was thought that one of Sony’s subsidiaries, The Orchard, was in direct competition with AWAL, as it also provided record label services for lesser-known artists. Bearing these in mind, the CMA found a real possibility of a substantial lessening of competition: Sony’s increased market share would allow it to raise prices to onerous levels. As Colin Raftery put it, the authority was “concerned that this deal could reduce competition in the industry, potentially worsening the deals on the table for many music artists in the UK, and leading to less innovation across the industry.”
On September 16, the CMA launched a Phase 2 investigation on the deal. Phase 2 is a much more in-depth process, which includes collecting data from the companies involved and executing theoretical tests to determine the apparent effect of the merger or acquisition on the market. An illustration is the “share of supply” test. The test is met where, as a result of the enterprises ceasing to be distinct, the combined entity will supply or acquire 25% or more of goods or services “of a particular description” in the UK or a substantial part of it.
The assessment under Phase 2 found that an acquisition would not result in a substantial lessening of competition. Firstly, the CMA found it unlikely that Sony and AWAL would compete for the same artists, with the chair of the independent group saying that the deal would not reduce the choice or quality of recorded music available or increase prices. Secondly, even though AWAL was found to be a competitor of The Orchard, the CMA said that the many other companies in the industry are sufficient to provide healthy competition.
Future of alternative labels
As the deal stands, the CMA will now undertake a 3-week consultation period on the provisional findings of Phase 2.
During the CMA’s investigation, Sony’s main argument was that the acquisition was a proper lifeline for AWAL, without which the company faced an uncertain future. The findings of the investigation show enough evidence for one to consider this an instance of distressed M&A: a broad term used to refer to deals where the business being sold is in financial distress. According to a CMA document, not only had AWAL “never been a profitable company” but it was also “poised to become less relevant, rather than to disrupt the distribution of digital music”. In this vein, the now strengthened position of the company will continue to promote healthy competition, not with major record labels, but with other players in the DIY-music industry. From this angle, AWAL’s continued existence maintains a wider variety of choices in the industry, which seems beneficial for independent artists, stemming from the possibility of lower prices and improved quality.
However, that image may be nothing more than a mirage. Paul Pacifico, CEO of the UK’s Association of Independent Music, believes the deal is “part of a pattern that threatens to gradually erode competition and diversity in UK music.” He refers to the fact that other players in the market are now also controlled by major businesses that may be less committed to supporting independent artists. As an illustration, Entertainment One was acquired by private equity firm Blackstone last year, whereas UnitedMasters recently started a “strategic partnership” with Apple. Ultimately, it is feared that the increased influence of major record labels in the DIY-music space might lead to alternative labels eventually adopting the traditional model of retained ownership and long-term contracts.
KCL Mergers & Acquisitions Society
The KCL M&A Society (KMA) was founded with the goal of providing students with valuable information and opportunities regarding the field of Mergers & Acquisitions. KMA aspires to provide students with a platform to learn and improve their skills whilst delving into the synergies of law and finance.