EMI's solo act is a big hit

The split from electrical retailer Thorn is helping the music label focus its talent
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The Independent Online
The Artist formerly known as Prince - of the suggestive lyrics and squiggly symbol - has just signed to a British record label for pounds 25m. George Michael, after he severed his links with Sony in a bitter courtroom battle, secured a pounds 33m deal for his next records.

The latter may be justified: George Michael's new album, Older, has already sold 4 million copies. Prince, in contrast, is suffering a critical backlash. But this year, the new all-female band Spice Girls stormed the charts, earning the label, and the band, huge profits. The girls' 2.5 million-selling debut single, Wannabe, has been number one in 25 countries.

The label in question, EMI - once the music half of Thorn EMI - is now the UK's only independent, quoted music company. Last week it reported maiden figures, following its demerger in August from Thorn, the Radio Rentals-to-Crazy George's consumer rentals group. To Sir Colin Southgate, chairman of Thorn EMI, and instigator of the demerger, a split was essential to unlock shareholder value. Thorn, went the argument, was clearly undervalued and obscured by the activities of its more glamorous sister.

Since the split was first mooted, shareholders have enjoyed a strong uplift. Of the two, EMI has been talked up as a takeover target. Shares fell from a peak of pounds 14.85 just after demerger, but were up strongly on the results. These showed a business spinning along at a decent pace, with pre-tax profits ahead 9.4 per cent to pounds 112.5m - despite an overall decline in music sales.

EMI, and its rivals, have long boasted theirs is a global market. For example, the Danish group Me & My achieved over 1 million sales worldwide - with 600,000 of them in Japan. Why Me & My is a hit in that country can only be answered by the Japanese. What is not in doubt is that EMI has the marketing machinery to propel a Danish group to stardom in Japan.

Research by Nikko Securities shows EMI is now the world's third largest record label and the largest music publisher. Music publishing is the licensing of songs, lyrics and melodies for use in films, TV commercials, and arranging fees from radio stations. Over recent years, record companies have woken up to the potential wealth buried in their back catalogues, and EMI has skilfully promoted its material.

EMI's results did, however, highlight the problems of the US market, where savage discounting is rampant. Sony Music Entertainment, headed by Tommy Mottola, has said market conditions are uncertain and shaky.

But EMI, Sir Colin points out, made up for American softness with strong sales in Asia and Latin America. He emphasises that, partly because the group is not so big in the US, the problems there have less impact.

Another spanner threatening the group's global aspirations is piracy. Bringing the Beatles to Bogota may sound like a good idea, but chances are the pirates got there first. Piracy is endemic in some parts of the world. However, EMI's advances in these regions, combined with tougher international action, suggest the problems are not insurmountable.

A separate part of the group is the HMV retail chain, with sales up pounds 53.3m to pounds 359.8m. The group, as usual, showed a first-half loss, with most of its profits earned in the lucrative Christmas season. HMV is a vehicle for EMI's overseas expansion. Its first German store opened in September, with "very encouraging results". Last year it opened two new stores in Queensland, Australia. Foreign openings will continue.

While total music sales were down, margins were in better shape, with the group concentrating on cutting costs where it can. The largest fixed costs for a record label are not the artists, but manufacturing and distribution. EMI has its house in order on this front and the City expects further cuts in costs.

Those costs highlight EMI's attractions as a takeover target. The global music business is divided between Sony, Warner, EMI, Polygram and Bertelsmann. Why should these companies rely on separate manufacturing and distribution deals to market similar products to the same outlets? As one analyst commented: "The industry is ripe for further consolidation."

The enormous sums paid to sign and retain top stars do carry an inherent risk. But the headline figures - like the pounds 25m for Prince - are linked to royalties. Artists who fail to sell will not earn the sum mentioned in the press releases.

The search for new stars has become more intensive. As a consequence, artists' shelf life seems to be dwindling: far more one-hit wonders and fewer bands with the longevity of, say, the Beatles (another EMI group).

EMI has several attractions. Against its peers, it seems well managed and may have achieved the difficult balance of retaining top talent, without losing sight of the bottom line. But does it offer value?

The shares trade on fairly stiff ratings: 22 times 1997 earnings, with a prospective yield of 3 per cent. But as the worlds of media and communications converge, content providers - such as music - will be in an increasingly strong position. EMI, with its strong back catalogue and continued investment in new talent, is well placed to benefit from this trend.


Share price 1,337.5p

Prospective p/e 24*

Gross dividend yield 2.7%

1994 1995 1996 1997* 1998*

Turnover (pounds bn) 2.77 2.89 3.52 3.65 3.84

Pre-tax profits (pounds m) 240.3 276.5 383.9 400.0 450.0

Earnings p/s (p) n/a n/a 48.7 54.3 60.0

Dividend p/s (p) n/a n/a 27.0 30.5 34.0

*NatWest Securities forecasts