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U.S. and European Regulators Approve Universal’s Purchase of EMI
U.S. and European Regulators Approve Universal’s Purchase of EMI
(about 5 hours later)
The Universal Music Group received regulatory clearance in Europe and the United States on Friday for its $1.9 billion takeover of EMI Music, the storied British record label behind the Beatles, the Beach Boys, Norah Jones and Coldplay.
For the Universal Music Group, months of uncertainty came to an end on Friday when it received regulatory clearance in Europe and the United States for its $1.9 billion takeover of EMI Music.
The deal allows Universal to expand its dominance as the world’s largest music company, but the compromise it struck with regulators significantly pares down its ambitions.
Next week the deal is set to close, and Lucian Grainge, Universal’s chairman, plans to address the EMI staff in Los Angeles as its new leader.
After months of tense negotiations, Universal agreed to divest itself of about a third of the assets of EMI, including most of Parlophone, EMI’s flagship label in Europe, along with a number of formerly independent labels, nine national subsidiaries of EMI across Europe and other rights. Universal will also sell a handful of its own assets, and it agreed to a set of market controls that will govern how it handles contracts with digital music services.
But serious questions about the deal remain to be answered, for Universal as well as for artists and consumers around the world.
The European Commission’s approval was announced on Friday morning in Brussels, and the Federal Trade Commission followed with its clearance shortly thereafter, calling for no additional concessions. The deal is expected to close within a week.
On Friday, after negotiations that lasted through the summer, the European Commission approved the deal under the condition that Universal sell a third of EMI’s assets. Those include Parlophone and various other labels in Europe, as well as the rights to release music around the world by some of EMI’s most famous acts, including Coldplay, David Guetta and Pink Floyd.
In a statement, Vivendi said it was pleased with the result and that the deal would help Univeral remain “true to its vision: to invest in talent and grow the company to offer consumers more music and more choice.”
The Federal Trade Commission also gave its clearance on Friday, with no added demands.
Universal’s deal for EMI, reached last November with Citigroup, was closely scrutinized on both sides of the Atlantic, with independent music groups, consumer advocates and major rivals contending that it would give Universal too much market power. Much of the concern centered on the new digital music market, in which, these critics argued, control of a large share of the available content could give any label too much of an advantage.
“It’s a historic day for UMG, and a historic day for EMI,” Mr. Grainge said in an interview. “Inevitably I’m disappointed that we were not able to retain Parlophone. However, I can only remain focused on the opportunity and the achievement.”
As a result of its acquisition of two-thirds of EMI, Universal will have about 36 percent of the world’s recorded music market, according to figures from Music & Copyright, a British trade publication. Sony Music Entertainment, the next largest company, has a 21.6 percent share, and Warner Music Group, the only other major, has 15 percent.
Where EMI’s castoffs end up may not be known for months. According to a memo to EMI employees sent on Friday by Roger Faxon, its chief executive, once Universal completes its takeover of most of EMI, artists on labels to be sold will fall under the authority of a “hold separate manager” that will report to a trustee for the commission. (In that memo, Mr. Faxon also announced that he would resign next week.)
A little more than a decade ago there were six major labels, but because of consolidation there are now three. Piracy and shifts in consumption patters have also greatly altered the music business. In 1999, the wholesale value of recorded music sales around the world was $28.6 billion, according to the International Federation of the Phonographic Industry; last year it was $16.6 billion.
The sale process can take six to nine months, and potential buyers must have “a proven track record in the music industry,” which would exclude private equity and other bidders.
The European Commission, the executive arm of the European Union, said in a statement that the asset sales allayed its concerns about the combined group’s market power and the effect on cultural diversity in Europe.
Joaquín Almunia, the European competition commissioner, also stressed at a news conference in Brussels that Universal must sell at least two-thirds of the EMI assets it must dispose of to a company that can serve as a credible competitor.
“Competition in the music business is crucial to preserve choice, cultural diversity and innovation,” Joaquín Almunia, the European competition commissioner, said in the statement. “In this investigation, we have paid close attention to digital innovation, which is changing the way that people listen to music. The very significant commitments proposed by Universal will ensure that competition in the music industry is preserved and that European consumers continue to enjoy all its benefits.”
Likely buyers include Warner, Sony and BMG Rights Management, a joint venture between Bertelsmann and Kohlberg Kravis Roberts. Various independents and entrepreneurs in music are also likely to bid.
Even with such large concessions, opponents of the deal complained that it would allow Universal to grow even bigger.
The decision by the European Commission and the F.T.C. was criticized by many of the consumer and independent music groups that have been speaking out against the deal for months. Among their concerns are that Universal, already the largest music company, would gain so much control over the music market that it could dictate terms to new digital services.
“It’s good to see that the commission has seen this deal as such a threat to the market that it has demanded and received truly swinging commitments on divestments,” Martin Mills, chairman of the Beggars Group, an independent company whose acts include Adele and Vampire Weekend, said in a statement. “However, that should not conceal that fact that Universal’s arrogance has paid off for them, that they have destroyed a significant competitor, and that even with these divestments their ability to dominate and control the market has reached even more unacceptable levels.”
“It’s good to see that the commission has seen this deal as such a threat to the market that it has demanded and received truly swinging commitments on divestments,” said Martin Mills, chairman of the independent Beggars Group. “However, that should not conceal that fact that Universal’s arrogance has paid off for them, that they have destroyed a significant competitor, and that even with these divestments their ability to dominate and control the market has reached even more unacceptable levels.”
Universal’s divestments include the right to release music by stars like Coldplay, Pink Floyd, Kylie Minogue and David Guetta around the world. 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. Universal also agreed to forgo so-called most favored nation clauses in contracts with digital music services for 10 years, which could help smaller labels negotiate for favorable terms.
Jodie Griffin, staff attorney at Public Knowledge, a digital rights advocacy group, said that by failing to block the merger, “the F.T.C. is allowing UMG to acquire unprecedented market power and amass a dominant collection of copyright holdings. UMG can now use those holdings not just to raise prices for consumers, but also to create a new tax on innovation among digital music services.”
The total value of the assets to be disposed of was unclear. They are said to generate about $450 million in annual revenue in Europe, but the global rights could add considerably more.
For Universal, which agreed to pay Citigroup the full price of EMI regardless of regulatory approval, the value of the deal will be decided by how much the disposed assets will fetch at auction.
Those assets will now go up for sale in an auction that is expected to be run by Goldman Sachs, and Universal must complete the sales within six to nine months. But in a condition placed on the deal by the European Commission, buyers must “have a proven track record in the music industry,” which music executives and analysts on Friday interpreted as excluding private equity bidders.
The value of the assets to be disposed is not clear. The labels in Europe are said to generate about $450 million in annual revenue there, but global rights could add considerably more.
The most likely buyers for disposed assets, analysts said, were Warner Music and BMG Rights Management, which is backed by Kohlberg Kravis Roberts. But the sale conditions may also make it easier for independent labels to participate.
“We’ve had enormous interest from the usual suspects,” Mr. Grainge said. “Bertelsmann has been a very aggressive entrant, and there are other trade buyers — experienced, well-known music professionals. We’re in discussions with all of them.”
In a memo to EMI employees on Friday, Roger Faxon, the label’s chief executive, said he expected Universal to “finally take control of this great and historic business” on Sept. 28. He also said that he and the label’s chief financial officer, Ruth Prior, would resign at the end of next week.
To avoid losing money, Universal and its parent company, the French conglomerate Vivendi, would need to sell assets for as much or more than they paid. According to Vivendi, it paid seven times earnings, a high but not extraordinary price by the standards of other recent music sales.
Although the F.T.C. cleared the deal with no additional concessions, its investigation lasted most of the year, and the negotiations in Europe were contentious.
“This has been one of the most difficult discussions,” Mr. Almunia said in a news conference in Brussels. 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, the private 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 Brussels, Mr. Almunia said that under the terms of the clearance, two-thirds of Universal’s divestitures should go to one buyer to create another heavyweight competitor with market power, and the remaining third should go to create another significant player in the industry.
“We cannot impose a buyer,” said Mr. Almunia, but he warned that if he saw “new threats to competition” emerging as a result of the divestitures he could take further action to ensure a competitive music market. Universal’s divestment package is widely considered in the music industry to be very large, although quibbles surfaced quickly on Friday about the true value of some of the headline names in the package.
“Pink Floyd has a contract with EMI that expires in 2015, so that divestment is not worth as much as the artists signed to long-term contracts,” Alice Enders, of the British firm Enders Analysis, wrote in an e-mail. “Pink Floyd had famously sued EMI in 2010 to prevent the unbundling of the tracks on their iconic albums on iTunes, which it won based on the terms of its 1999 contract, and it restricts the exploitation of its catalog on Spotify and other digital music services.”
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.
Some analysts believed that the deal may turn out well for Universal, and that the company will still be likely to find significant savings through the merger, even with disposals.
Some analysts believed that the deal may turn out well for Universal, and that the company will still be likely to find significant savings through the merger, even with disposals.
“In many ways, Unviersal and EMI must be reasonably happy,” said Claudio Aspesi, a media analyst at Sanford C. Bernstein & Company in London. “They would probably prefer to buy the whole thing, but still they are much better of than they were yesterday.”
“In many ways, Universal and EMI must be reasonably happy,” said Claudio Aspesi, a media analyst at Sanford C. Bernstein & Company in London. “They would probably prefer to buy the whole thing, but still they are much better of than they were yesterday.”
Ben
Sisario reported from New York and James Kanter from Brussels.
