EMI in a spin as music merger is set for Brussels clearance

The UK record group is willing to sacrifice its top acts to meet Time Warner at the altar
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The Independent Online

EMI, Britain's last major force in the music industry, is in a terrible spin. Its £14bn merger with Time Warner's music division is receiving such a rough ride from Europe's competition regulators that the company is offering to sell some of its crown jewels to get the deal through.

EMI, Britain's last major force in the music industry, is in a terrible spin. Its £14bn merger with Time Warner's music division is receiving such a rough ride from Europe's competition regulators that the company is offering to sell some of its crown jewels to get the deal through.

The EMI chairman Eric Nicoli has reportedly volunteered to offload its Virgin Records label, home to the Spice Girls, the Rolling Stones, David Bowie and Janet Jackson. Meanwhile Warner Music, whose artists include Madonna and Fleetwood Mac, is offering to sacrifice Chappell Music, its music publishing business. There have even been suggestions that EMI is willing to jettison its valuable distribution arm that delivers compact discs and other recorded music to retail outlets.

The European Commission's advisory committee on mergers, which is made up of competition officials from the member states, is due to meet again today to consider whether the merger should be approved. According to Brussels officials the final decision will be announced a week tomorrow, though under the timetable a verdict does not have to be delivered until 18 October .

Today's meeting has revived hopes at EMI and Warner that their promises of disposals may have done just enough to salvage the deal. This follows a draft conclusion circulated in Brussels last month which recommended the deal be blocked on the grounds that the combined group would have a dominant position in the market for recorded music.

But as EMI waits anxiously for the commission's verdict several questions remain about the future of Britain's flagship record company. First, if the concessions EMI must make to get the deal through are so draconian, is it really worth doing anymore? Second, if the deal does get blocked where does EMI then turn?

Some analysts are sanguine as to the implication of wholesale disposals of record labels. "Shareholders couldn't care less how EMI is sold, in one go or in bits," says Anthony de Larrinaga, media analyst at SG Securities. "It all depends on what kind of premium for control EMI and Warner would get for the disposals and whether they would offset the lower level of cost synergies that would then be derived from the merger. The devil would be in the detail."

An important issue for shareholders here is that the European Commission is keen for disposals that would create a new, independent competitor in the music market. This is because the commission has expressed concern that the number of major record companies would fall from five to four as a result of a Warner-EMI tie-up. If the other majors are ruled out of the bidding it would reduce the value of EMI's disposals as financial buyers would not be able to pay high prices due to the lack of synergy benefits. Sir Richard Branson has already expressed an interest in buying back the label he founded though it is unclear if the Virgin group has the funds.

But if the terms are changed significantly, then the deal would probably require a fresh vote by EMI's shareholders. Since many were hardly enthusiastic about the terms of the original deal this could be a fraught process. EMI's shareholders were always uncertain as to the merits of handing management control to Time Warner in return for a special cash payment of 100p per share.

The performance of EMI shares since the deal was announced in January tells the tale. They have fallen 14 per cent to 559.5p in that time and have underperformed the market by a similar amount.

But if the deal is blocked completely Mr Nicoli would find himself in a strategic bind. As one analyst says: "They'd be back to square one. In a pickle."

Part of the problem would be that when EMI was run by Sir Colin Southgate the company could always claim that it was not up for sale as no bid was ever formally tabled let alone agreed to. But with Mr Nicoli rushing down the aisle with the first half decent-looking girl to give him a glance the game is up. The For Sale sign has been hoisted high for all to see.

The worry is whether there would be any other bidders out there should the EMI-Warner marriage founder? Most analysts doubt it saying Bertlesmann and Vivendi-Universal would face the same kind of regulatory hurdles as Time Warner.

A further concern is that even if some form of consolidation is allowed in the music industry it will not address the increasing problem of music piracy where songs are digitally downloaded from the internet. America Online's $135bn merger with Time Warner shows the way forward though this deal has also yet to be cleared by the competition authorities.

The key, analysts say, is for the music majors to group together to agree an industry standard that will govern digital downloads and protect their intellectual copyright.

So far the music majors have been accused of a "head in the sand" attitude to digital music. As one panelist at a conference organised by First Tuesday, the internet entrepreneurs club, said earlier this week. "The major labels don't seem to understand that we don't give a damn if they go bust. You can't incentivise me to pay $3.50 for a track I can download from Napster for free. I'm not saying it's right, I'm just saying it's free!"

But whatever happens EMI's Mr Nicoli will need to demonstrate that if his Plan A fails, he has a credible Plan B. As one analyst says with some understatement: "I think Eric's got a bit of a challenge on his hands."

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