Outlook: Jilted EMI has to prove its worth now

Outlook On record companies in a spin; where branson finds start-up capital; and how Vw is near the winning line

ED BRONFMAN of Seagram seems to be putting it around with the abandon of an ageing rock star in his attempt to find a music company to dally with. First EMI, now PolyGram. If there were anyone else it was possible to flirt with, Mr Bronfman would be in there.

But then again, perhaps it was the other way round. Was it EMI, desperate to be taken over, which like some young groupie approached him? Realising there was an arguably more attractive prize on offer, EMI's advances were brushed aside, and Seagram turned its attentions instead to PolyGram. The spin being applied to events by all parties makes it unlikely we'll never get to the bottom of what happened.

Whatever the truth, the episode has left EMI looking jilted and just a little foolish. Coming on top of the management upheavals of the last few months, this has given the impression of a company all at sea and in some need of assistance. So what future for EMI now?

In the City it is quite widely believed that the industry is ripe for consolidation and that EMI would inevitably, as the only independently quoted company of size, play a pivotal role in any such restructuring. But actually this is the least likely outcome. The big five record companies of EMI, Sony, Time Warner, PolyGram and Bertlesmann, already have about 75 per cent of the market between them.

In this respect, the music industry is quite unlike other businesses gripped by the consolidation bug. For instance, if the world's two biggest pharmaceuticals companies were to merge, it would create a behemoth for sure, but even so the new monster wouldn't have more than 10 per cent of the world market for prescribed drugs. The same is not true for music. Any combination of alternatives within the big five would run into severe regulatory difficulties, particularly in the US.

Obviously there is no such stumbling block for those from outside the industry, or with only a limited presence in it (like Seagram or Disney). The music industry is notoriously badly and under managed. Its poor operating margins are a constant source of amazement to analysts. The reasons for this are many and varied but the most important is the self evident one that many of those who work in it regard it as a life style business. As one seasoned City observer puts it, "there are an awful lot of snouts in the trough" (double meaning intended). It may be possible, then, to extract much better value out of these businesses than they presently yield.

However, EMI is one of the better managed companies in the business, despite the apparent turmoil at the top. Furthermore, there is little evidence that Seagram, or even Disney, could do the job any better. Seagram's recent record, both strategically and in terms of core performance has been at best mixed. Investors have also fallen out of love with Disney. It is not certain either would be doing their shareholders a service by paying the necessary bid premium.

Part of EMI's problem with the City has been that expectations of its value were driven to exaggerated heights. By the same token, though, Sir Colin Southgate, the chairman is absolutely right to believe a bid at little more than pounds 6 a share undervalues the company. Now that he's been forced, reluctantly, to return to his day job, the pressure is on for him to prove he's right, for it may well be that there's no one either allowed or prepared to bid much more.