Thorn EMI chiefs to make pounds 12m on options

Demerger unveiled: Long-awaited pounds 8bn break-up is scheduled for July, giving separate listings for rental business and music operations

The top three executives of Thorn EMI stand to make pounds 12m on their stock options alone, following the planned demerger of the company's music and rentals arms.

The pounds 8bn break up, announced formally yesterday, would see a separate listing in London and New York for Thorn's rental business, which includes the Crazy George's and Radio Rentals chains in the UK. The rest of the company, including the EMI music operations and HMV retail arm, would also be publicly quoted in London.

Sir Colin Southgate, the current chairman, would take the same role at both companies following the merger, which is scheduled to take effect in July. James Fifield would remain president of EMI Music, while Michael Metcalf would retain the role of chief executive at Thorn.

The company's compensation committee has yet to decided how to treat the senior executives' options. But the favoured approach would see an acceleration of the current scheme, giving Sir Colin a payoff of pounds 6.5m, Mr Fifield pounds 3.8m and Mr Metcalf nearly pounds 2m.

The three executives were paid salaries and bonuses totalling pounds 7.5m last year, including a base package plus bonsuses of pounds 6.4m for Mr Fifield.

Following the demerger, a new stock option scheme would be introduced at both companies, to which all three men would be entitled.

The long-heralded merger plan has helped fuel a huge rise in Thorn-EMI's share price, from about pounds 10 last March to nearly pounds 17 last night. Analysts expect the new Thorn would be worth about pounds 2bn, with EMI, which includes the lucrative music publishing business, valued at about pounds 6bn.

"Certainly the demerger plan has proved to be a good deal for shareholders," Simon Duffy, company finance director, said. "It hasn't been bad for options holders either."

The high share price has also been fuelled by rampant bid speculation, with US entertainment giant Disney, Rupert Murdoch's News Corporation and the new Steven Spielberg venture, DreamWorks, all touted as potential buyers.

The demerger, which is seen in part as defensive, would leave EMI as a potential bid target on its own, media analysts said last night. The prospect of a bid before the break-up is finalised faded last night but analysts expect at least some overseas interest in the EMI business once the demerger is approved.

Analysts warned that the price any predator would have to pay could frighten off all but the biggest companies. "I suspect that only the big American companies will want to try it on," said one leading analyst.

Mr Duffy added: "I don't think there is much point in big film and television companies buying a pure music company. I haven't been convinced there is any evidence that value can be released."

Sir Colin said any buyer would have to pay a "maxi price" in order to win EMI.

The demerger is expected to cost the company no more than pounds 100m, according to the company's own estimates. That includes tax costs of about pounds 50m. The restructuring costs would be in the region of pounds 30-50m.

Mr Duffy said the tax clearances have been finalised in several jurisdictions, including the UK, and the company was confident authorisation would be received from other countries well in advance of the demerger date.

No details about the share of corporate debt or the capital structure of the new companies has been released, leading two credit rating agencies to put Thorn EMI on credit watch.

The company also unveiled its nine month figures, showing operating profits up by nearly 27 per cent to pounds 456.7m. All three major divisions, including HMV, showed strong growth.

Sir Colin warned that the fourth quarter would be "traditionally quiet," but said he remained confident about full-year results.

Music division sales were boosted by big sales of the Beatles' Anthology album, the first of a three-CD series. It hit number one in the US chart, and has sold 9 million units world-wide. Another EMI title, Queen's Made in Heaven, reached number one in the UK, and sold 5 million.

The company's North American label, EMI-Capitol, held number one and number two positions in the charts during the period with The Beatles and Fresh Horse, the new album from US artist Garth Brooks. Overall, EMI's music division had 27 albums with sales of more than 1 millon in the period.

The rentals division saw profits rise by 24 per cent to pounds 125m in the period, helped by the closure of the Rumbelows retail chain. Mr Duffy said the US performance was the only disappointment and blamed "the poor state of the US consumer durables market."

Sales at HMV increased by 56 per cent to pounds 588m in the period, with profits recovering to pounds 21m.

Michael Metcalf of Thorn plc: Operates rental and rental purchases businesses in 16 countries, with 2,300 outlets. It carries a wide range of consumer durables, including televisions, cookers, computers and mobile phones. Last year, it sold the money-losing Rumbelow's chain in the Uk, leaving it would a cash-generative, if dull core business. The main UK brands are Crazy George's and Radio Rentals. Thorn had pro-forma sales last year of pounds 1.5bn, and operating profits of pounds 152m.

Sir Colin Southgate: became managing director of Thorn EMI in 1985, and launched a radical restructuring that saw the subsequent sale of 100 businesses, with combined sales of pounds 2bn. His current salary plus bonus is pounds 700,000

James Fifield of EMI: One of the world's leading music recording and publishing companies, taking in 65 record companies and 23 music publishers in 37 countries. Among its many labels are EMI, Virgin, Chrysalis and Capitol. The new company would include HMV, the music and book retailer, which recently took over the Dillon's bookshop chain. HMV has 330 stores world-wide. EMI and HMV together had sales last year of pounds 2.7bn, and operating profits of about pounds 315m.