EMI seeks merger with MCA

Music group wants a US label - and a defence against hostile bidders. Richard Halstead reports
EMI, the music group which is home to George Michael and the Spice Girls, has approached Seagram about merging all or part of its business with the latter's MCA Music division.

The approach is understood to have initially met with a frosty reception from Edgar Bronfman Jr, chairman of Seagram, as it would have involved EMI buying MCA from Seagram, a business that Mr Bronfman has repeatedly said is central to his future plans for the Canadian drinks-to-entertainment company.

But it is understood that talks are still ongoing, and may lead to an agreed merger early in the new year, with Seagram assuming overall control but with key roles for both Sir Colin Southgate, EMI's chairman, and Jim Fifield,chief executive.

Any agreed deal would value EMI, which was demerged from Radio Rentals group Thorn in August, at pounds 6.5bn or more.

This weekend, EMI sources confirmed its ambitions to become a larger player in the US, where it currently holds 9 per cent of the record market, but said it would still prefer to be in charge of its own destiny. "We have an excellent distribution network in the US and the rest of the world," one source said. "What we need now is a talent-rich US label that perhaps does not have a worldwide marketing presence." MCA, the source added, "would be a good fit".

However the source insisted that many possibilities were still being considered, including a plan to take cross-shareholdings between MCA and EMI coupled with a joint worldwide distribution agreement. Another would be for EMI to set up a joint venture with Dreamworks SKG - the entertainment company headed by Steven Spielberg, David Geffen and Jeffrey Katzenberg - which distributed EMI artist George Michael's latest album.

At present, the global market for music sales is $40bn (pounds 24bn), of which 70 per cent is controlled by just five companies: EMI, Polygram, Sony, Warner, and Bertelsmann.

The talks between Seagram and EMI come as the prospect of a hostile bidder emerging for EMI grows with every fall in the share price. On Friday, the shares fell 47p to 1,331p in a weak market, well below the high of 1,488p reached in late September, which valued EMI at pounds 5.77bn. Disney and cable firm Viacom have previously been tipped as bidders.

"EMI have certainly not tried to make themselves bid-proof," said Dennis Exton, media analyst at Nikko Securities. "The shares are now priced below their enterprise value, and an opening hostile bid in the range of 1,450p a share is now a real possibility."

Analysts have pointed to Mr Fifield's pay package as a sign that they believe EMI's independent days are numbered. He will earn a bonus of pounds 4m next year if he meets share price and profit targets and has a pounds 12m "golden parachute" should he leave following a takeover

It is believed that talks would be more advanced but for Seagram's need to divest the parts of MCA - which it took over in a $10bn deal last year - that it does not want. It also has to rejig its finances to fund the price tag that EMI would attract.

The approach to Seagram is part of EMI's plans to enlarge its presence in the US market, which has been the weakest element of its worldwide music business.

In recent years the UK and Japanese markets have proven rich sources of artistic talent for EMI, but aside from its multi-million-selling album from its US act The Smashing Pumpkins this year and a few "emerging" acts, very little from its US offshoots EMI America and Capitol have proven worldwide smashes.