Europe Said to Be Close to Approval of EMI Deal

Fordham Law in NYT, September 20, 2012

Media Source

European regulators are set on Friday to approve a reduced version of the Universal Music Group’s $1.9 billion takeover of EMI Music, allowing Universal to expand its dominance as the world’s largest music company but significantly paring down its ambitions, according to several people involved in the talks.

To gain the approval of theEuropean Commission, Universal will agree to divest itself of a third or more of the assets of EMI, the venerable British record company that releases the music of the Beatles, the Beach Boys, Katy Perry and Coldplay, said these people, who spoke anonymously ahead of a formal announcement.

The divestments include a number of EMI’s most prominent labels in Europe, like Parlophone, as well as classical and jazz catalogs, several of the independent labels that EMI has bought over the years, and various national subsidiaries across the Continent. In addition, Universal will sell worldwide rights to release the music by the acts on those labels, including superstars like Coldplay.

Other conditions, including so-called behavioral remedies restricting Universal’s actions in the marketplace to benefit digital services and smaller labels, could also apply.

The total value of the assets to be disposed of was unclear on Thursday. They are said to generate about $450 million in annual revenue in Europe, but the global rights could add considerably more. One consolation for Universal is that it will not have to sell recording rights for the Beatles or Robbie Williams, one of EMI’s biggest acts in Britain.

The deal, which has already been cleared in Australia, Canada, Japan and New Zealand, is being reviewed in the United States by the Federal Trade Commission, with a decision expected in the coming days. The F.T.C. could demand further divestments from Universal, but that is considered unlikely.

The European Commission and Universal both declined to comment. Joaquín Almunia, the European competition commissioner, said at a conference at Fordham Law School in New York on Thursday that his team was “in the last hours of our assessment” of the deal and would announce its decision on Friday in Brussels. The people briefed on the deal said it was possible that changes could be made at the last minute.

The takeover will advance the corporate consolidation of the music industry that has been under way for more than a decade. But for Universal and its parent company, the French media and telecommunications conglomerate Vivendi, the EMI ruling is a painful victory.

The negotiations with European regulators went on for months, and by all accounts were tense. Regulators demanded significant concessions to preserve competition and cultural diversity in Europe, and Universal initially was reluctant to give up large pieces of EMI.

The difficulty for Universal was rooted in the unusual structure of the deal, which was struck with Citigroup in November: in it, Universal agreed to pay Citi the full price of EMI, regardless of regulatory approval. (Its first payment — about $1.75 billion, or 90 percent — was made earlier this month, and the balance is due when the deal closes.)

Citi seized EMI in early 2011 after the label’s previous owner, theprivate equity firm Terra Firma, defaulted on a $5.4 billion loan. In a parallel deal reached last November, an investor group led by Sony paid $2.2 billion for EMI’s music publishing assets. That deal closed in June.

Universal’s agreement with Citi put pressure on its executives to preserve as much of EMI as possible, since the company would face losses if it were forced to sell assets for less than it paid. In addition, Universal had estimated $160 million a year in savings by merging the two companies, but not all of those savings would be realized from a diminished EMI.

In late July, Universal offered to sell about two-thirds of EMI’s holdings in Europe, including much of Parlophone and top acts like the D.J. David Guetta. Also included were the former independent labels Chrysalis, Mute and Ensign; EMI Classics and Virgin Classics; EMI’s share of the profitable pop compilation series “Now That’s What I Call Music!”; and EMI’s subsidiary companies in Belgium, France, Sweden and other countries.

The divestment package that the European Commission agreed to will include those pieces with some additions, as well as global rights.

The damage to Universal and Vivendi could be minimized if Universal can get good prices for the divested assets. Several parties are said to be interested, including BMG Rights Management, a joint venture between Bertelsmann and Kohlberg Kravis Roberts. Daniel Miller, who founded the Mute label in 1978 and sold it to EMI in 2002, has also expressed interest in buying it back.

Universal’s acquisition of EMI has drawn criticism from independent music companies, consumer advocates and Warner Music, one of its major rivals, who contend that Universal would gain too much market power. Already the largest label, with about 30 percent of the worldwide recorded music market, Universal would have about 40 percent if it absorbed EMI whole.

Randy Stutz, director of special projects at the American Antitrust Institute, which has asked the F.T.C. to block the deal, said that even with the divestments, Universal’s enhanced size would pose problems for the music industry and for consumers.

“Maybe you can fix it so the market share figures aren’t quite as scary, but you’re still down to three major record companies on planet Earth,” Mr. Stutz said. “That means the next great innovator has to negotiate with an even tighter oligopoly if it wants to license the major music catalogs, and that kind of bargaining dynamic doesn’t tend to favor the innovator or, ultimately, the consumer.”