EMI, the record label of the Beatles, known more recently for debt and disposals, may become even smaller than buyer Universal Music Group has proposed, as competitors say suggested cuts don’t go far enough.
Vivendi SA (VIV)’s Universal Music unit and European Union regulators met yesterday to discuss if the offer to sell 60 percent of EMI’s European assets satisfies competition concerns, according to a person familiar with the matter. Some third parties who looked at the proposals under an EU review process say they don’t go far enough in reducing the presence of the world’s largest record company in some European markets, according to two other people.
Universal Music agreed to buy EMI from Citigroup Inc. (C) last year for 1.2 billion pounds ($1.9 billion). It may also have to dispose of global rights to EMI assets and put more up for sale to appease European Union regulators. That would make the iconic London-based label less attractive for Vivendi, saddled with debt and under investor pressure to improve earnings, as it faces a deadline next month to pay for EMI.
“If Universal Music has to give up the global rights for everything it would push the deal toward unprofitability,” said Simon Dyson, an analyst at Informa Media & Telecoms. “Universal has invested a lot of money into this deal and if it doesn’t go through, then they have to sell EMI, and companies won’t offer them anything near what they paid for it.”
Representatives for the European Commission, Universal and EMI declined to comment.
Universal Music last month offered to dispose of EMI’s Parlophone Records, home to Coldplay and Gorillaz, in the U.K., while keeping the label’s Beatles songs, according to people familiar with the matter. It said it would also sell labels including EMI Classics, Virgin Classics and EMI units in countries such as France, Belgium, Poland and Sweden.
While some rivals oppose the package, Universal Music was told yesterday that a majority of third parties found its concessions sufficient, one of the people said, adding that the parties will continue to meet to refine the disposals.
If Universal Music also sells global rights, the value of EMI disposals may be as much as 300 million euros ($370 million), said one person familiar with the matter. Universal Music has budgeted in case it must divest global rights, said the person.
Vivendi dropped 1.1 percent to 15.57 euros at of 9:26 a.m. in Paris. The stock had declined 3.8 percent this year through yesterday, valuing the company at 20.5 billion euros.
Citigroup agreed in November to sell EMI’s recorded music and publishing business in separate transactions for a combined $4.1 billion. Universal Music agreed to buy EMI’s recorded division while a Sony Corp.-led group agreed $2.2 billion for publishing. Citigroup seized EMI from Guy Hands’s private equity firm, Terra Firma Partners Limited, in February 2011 after it failed to meet loan terms. Hands bought EMI for 4 billion pounds in 2007.
EMI’s recorded business, which houses the Beatles and artists including Coldplay, Katy Perry and David Guetta, saw its headcount drop by 34 percent in recent years, artists and repertoire spending was cut by more than half and the roster of artists fell by 44 percent, according to internal documents of the label obtained by Bloomberg.
Uncertainty over EMI’s ownership “deterred new artist sign-ons or renewals,” the documents stated. “Large advances are no longer the norm at EMI.”
Alice Enders of Enders Analysis in London estimates the global recorded music market will lose almost half its value between 2005 and 2016. A combination of EMI and Universal Music makes sense because EMI gets much of its revenue from catalog rights while Universal leans more heavily on new releases, she said.
“EMI has been raped by financiers over the past 10 years trying to squeeze it for cash without a passion for the industry,” said Lohan Presencer, chief executive officer at the U.K.’s Ministry of Sound, a network of independent record labels. “We as an industry are better custodians of it than venture capitalists.”
Impala and Merlin, independent record label groups in Brussels and London, have publicly opposed the EMI purchase, saying the deal would give Universal Music too much power in many European markets.
“I remain steadfast in my view that the best outcome for consumers is for this merger to be blocked,” Merlin CEO Charles Caldas said this week in an e-mail. “If the merger goes through, even with the kinds of concessions suggested in the press, we think it will result in fewer choices and higher prices. Universal has plenty enough market power as it is. They should not have more.”
Another party that reviewed Universal Music’s proposals under the EU process called for more disposals in European markets such as Germany, Italy and Spain as well as worldwide rights for all assets, according to a person familiar with the matter.
Enders said the divestment of global rights at EMI would probably also satisfy competition concerns of U.S. regulators. The Federal Trade Commission is also examining the purchase.
The Sony-led group won European Union approval in April to buy EMI publishing after agreeing to sell the global rights to catalogs that included hits by Robbie Williams and Ozzy Osbourne. The deal was approved in the U.S. in late June.
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