EMI sold in pieces to Sony and Universal Music

EMI Group Sold as Two Separate Pieces to Universal Music and Sony
by Alex Pham - Los Angeles Times
November 12, 2011

The century-old EMI Group music company has been split in two and sold for $4.1 billion to Universal Music Group and Sony Corp. The absorption of the music giant leaves only three major record companies in control of an eroding industry.

The deal announced Friday calls for Universal to acquire EMI's recorded music division from EMI parent company Citigroup Inc. for $1.9 billion, and Sony to acquire the smaller but more lucrative music publishing business for $2.2 billion.

The two edged out rival bids from Warner Music Group and BMG Chrysalis. Warner had vied for the recorded music unit whose roster includes Norah Jones and Lady Antebellum, while BMG Chrysalis bid for EMI Publishing, whose catalog includes classics such as "Over the Rainbow" and "New York, New York."

With the deal leaving Warner, BMG and Universal as the only major players, antitrust regulators in the U.S. and Europe are expected to review the transaction for possible anti-competitive issues.

But the industry is shrinking, mainly because the big houses are struggling to remain profitable and now have to compete with the numerous alternatives that technology and the Internet have given to artists.

Globally, music sales sunk to $18.4 billion last year from $29.4 billion in 2005, according to a report from research firm Enders Analysis.

As a result, the power of record companies to dictate what albums are produced has been diluted, said Mike McGuire, a music analyst with market research firm Gartner Group. "The choke point that labels enjoyed for years because they owned all the recording studios and all the best producers are over," McGuire said.

Artists now have a plethora of ways to distribute and promote their music and are no longer beholden to record labels, he said. "Labels will have to compete on their ability to help artists."

That's a key reason why antitrust regulators may be likely to clear the deal, legal experts said.

"In a different era, a merger between any of those companies would raise major red flags at the antitrust division," said Mark Lemley, a professor at Stanford Law School.

Citing Sirius' 2008 merger with satellite radio rival XM, and Live Nation Entertainment's merger with Ticketmaster last year, Lemley said: "They're letting through mergers in even more concentrated markets, and even some that looked like the merger that created monopolies."

In addition, the recording business is not the crown jewel of EMI. It's the publishing business, which holds the rights to 1.4 million songs, including those by David Bowie, Stevie Wonder and many others.

Though smaller in size than its recorded music division, EMI's publishing group punched above its weight when it came to earnings. The group accounted for 29% of the company's revenue in 2010, the last year for which financial results were made available, but it made up 45% of EMI's operating profit.

The deal is a coup for Sony Chief Executive Howard Stringer, who has made music a priority for the company at a time when the industry has been ravaged by piracy and plummeting CD sales. In 2008, Stringer spent $1.2 billion to buy out Bertelsmann's 50% share in a joint venture, Sony BMG.

The sale brings to a close EMI's 114-year run. The independent music company was founded in 1895 by Emile Berliner, a Jewish German immigrant to the U.S. who is credited with inventing the gramophone.

It also caps years of financial and corporate turmoil for EMI. British private equity firm Terra Firma bought the company for $4.7 billion in 2007, using mostly borrowed funds. When it became clear early this year that Terra Firma could not service its enormous loans, Citigroup, the company's primary banker, took ownership of EMI. Citigroup wrote off 65% of EMI's debt with the intention of selling the music company by the end of the year.

Citigroup doesn't walk away free and clear from the deal, however. It must continue to shoulder the cost of a pension plan that covers 21,000 EMI employees, estimated to cost from $200 million to $600 million. Citigroup did not announce how Universal and Sony have arranged to deal with EMI's remaining $1.9-billion debt held by Citigroup.
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EMI Is Sold for $4.1 Billion in Combined Deals, Consolidating the Music Industry
by Ben Sisario - The New York Times
November 12, 2011

EMI, the venerable music company that is home to the Beatles, the Beach Boys and the Motown song catalog, has been sold for $4.1 billion through a pair of deals that usher in a new wave of consolidation in the music industry.

In a complex sale brokered by Citigroup, the Universal Music Group, a division of the French conglomerate Vivendi, will absorb EMI's recorded music operations for $1.9 billion, while EMI's music publishing division will be sold for $2.2 billion to a consortium of investors led by Sony, the companies announced on Friday.

Besides the Beatles, music's biggest trophy, EMI's recorded music assets include Pink Floyd, Nat King Cole, Frank Sinatra's middle period and current stars like Katy Perry and Coldplay. Its labels include Capitol, Virgin and Blue Note.

The sales ended a four-month auction that was slowed by the instability of the international credit markets. Yet prices were higher than many in the music industry and on Wall Street had expected, helping Citi to recoup some of the $5.5 billion it had lent four years ago as part of a disastrous private equity takeover of the label.

The split of EMI completes the biggest shift in music's corporate structure in almost a decade, reducing the number of major record companies from four to three and allowing Sony and Universal, already the biggest forces in music, to become even bigger.

With Universal and Sony now far outweighing the third major, the Warner Music Group, the competitive landscape of the industry is expected to shift. Warner, which was sold for $3.3 billion in May to the Russian-born investor Len Blavatnik, had offered about $1.5 billion for EMI but dropped out of the bidding two weeks ago over a disagreement about the price.

"From a competitive standpoint it would have been better for the industry if Warner and EMI had merged," said Jeffrey Rabhan, the chairman of the Clive Davis Institute of Recorded Music at New York University and an artist manager. "You want to have three strong players, not two and a half."

Universal and Sony's deals for EMI will be subject to regulatory approvals, and Universal -- which already controls about 30 percent of the music sold around the world -- may face close scrutiny in Europe. EMI's market share for recorded music is about 9 percent.

EMI, a British company with roots dating to 1887, has been in financial turmoil since 2007 when Terra Firma, a private equity firm, bought it for $8.4 billion using the $5.5 billion loan from Citi. The bank seized EMI in February after the label defaulted on the loan.

Lucian Grainge, the chairman of Universal, pledged to preserve the British identity of EMI.

"For me, as an Englishman, EMI was the preeminent music company that I grew up with," Mr. Grainge said in a statement. "Its artists and their music provided the soundtrack to my teenage years. Therefore, U.M.G. is committed to both preserving EMI's cultural heritage and artistic diversity and also investing in its artists and people to grow the company's assets for the future."

In their most recent annual reports, Universal had just under $6 billion in revenue last year, Sony's music operations $5.7 billion and Warner $3 billion. EMI's recorded operations had $1.8 billion in revenue and its publishing side $749 million for the year ended March 2010, the last period for which it reported accounts.

Universal said it would finance the deal with its existing credit lines. In apparent anticipation of antitrust challenges, the company said it would sell $680 million in "non-core assets." When it bought the BMG publishing catalog in 2007, Universal had to sell more than $100 million in assets to secure the approval of the European Commission.

Sony's bid was financed by a hodgepodge of investors including Blackstone's GSO Capital Partners unit; Mubadala, the investment arm of Abu Dhabi; Jynwel Capital, from Malaysia; and the media mogul David Geffen. The group was corralled by Robert Wiesenthal, chief financial officer of the Sony Corporation of America. (Music publishing, separate from recorded music, concerns the copyrights for the music and lyrics that underlie every recording.)

Sony's $325 million investment gives it a minority stake in the venture, which will keep the EMI name. It will be run as an independent unit within Sony by Sony/ATV, the publishing company owned by Sony and the estate of Michael Jackson. "It has been a long process, but something that people have viewed as difficult -- the problems in the financial markets -- ended up accruing to our benefit," Mr. Wiesenthal said. "We found long-term investors, who are not just looking at the short-term returns typical of private equity."

The Sony deal also reunites Martin Bandier, Sony/ATV's chief executive, with EMI's publishing division, which he had built into the industry's leader before he left in 2007. Among the 1.3 million songs controlled by EMI are a catalog of thousands of Motown songs, and it also has deals with many current R&B and pop songwriters like Alicia Keys and Kanye West.

Some analysts said the disruptions in the music business over the last decade mean that the labels must now justify themselves to generations of artists who have learned to do without them.

"Even with the very large catalogs that these two labels will not have big chunks of, it's still going to be an interesting challenge to see how they remake themselves in the 21st century," said Mike McGuire, a media analyst at Gartner. "So many options are available to artists now that the labels are going to have to show, more than ever, their value as this gigantic entity."