Europe, U.S. approve Universal purchase of EMI unit

BRUSSELS/WASHINGTON Fri Sep 21, 2012 4:11pm EDT

A man enters EMI offices in west London August 18, 2010. EMI's parent company said on Wednesday further equity injections may be needed, particularly in 2011, as the music group continues to struggle under the weight of its debt in spite of an improved trading performance. REUTERS/Toby Melville

A man enters EMI offices in west London August 18, 2010. EMI's parent company said on Wednesday further equity injections may be needed, particularly in 2011, as the music group continues to struggle under the weight of its debt in spite of an improved trading performance.

Credit: Reuters/Toby Melville

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BRUSSELS/WASHINGTON (Reuters) - Vivendi's Universal Music Group won European and U.S. approval for its $1.9 billion purchase of EMI's recorded music business on Friday, with the EU requiring the company to sell labels that account for about a third of the British company's revenues.

The U.S. Federal Trade Commission approved the transaction without conditions. With the regulatory approvals, the companies are now free to close the deal.

Universal said on Friday it would sell some of EMI's most prized assets, such as the Parlophone label - home to star acts such as Coldplay and Queen - in a move which some analysts said significantly reduced the deal's attractiveness.

"The whole point of the deal was the back catalogue and getting EMI's artists. But when you look at the bands they had to give away, they are some of their best ones," said Conor O'Shea, analyst at Kepler Capital Markets.

Nonetheless, the deal cements Universal's No.1 position in the European music industry, with a vast library of current top-selling and legendary names including Jay-Z, Kanye West, Katy Perry, Robbie Williams, Pink Floyd and The Beatles.

Lucian Grainge, chairman and chief executive of Universal Music Group, said the company was thrilled to have the deal cleared, while acknowledging the depth of the concessions.

"We've ended up divesting probably more than we had anticipated at the beginning," he said.

Some analysts said the sale of assets equivalent to around 30 percent of EMI's group revenues, or roughly 10 percent of sales for the combined group, could raise as much as $750 million and help Vivendi reduce its debt.

But a source close to the deal put the value of the assets to be divested at about $350 million. The source did not want to be named to protect a business relationship.

The European Commission, which had raised concerns over the potential market power of the combined group, said the asset sales would have to be completed in six months.

EMI is being sold by Citigroup Inc, which took control of it after its previous owner, Guy Hands' buyout shop Terra Firma, defaulted on loans owed to the investment bank. The bank cleared out the debt, broke the company in two and announced sale of the parts last November.

Universal is buying EMI Recorded Music while Sony snapped up EMI Music Publishing, the portion of the company that handles copyrights to 1.3 million songs, for $2.2 billion.

Merlin, a global rights agency that represents major independent music companies, expressed disappointment that the deal would go through because of the potential for Universal to have disproportionate clout in the digital market.

"That said, the concessions Universal has had to make to get this deal through are significant, and must make this a very different deal to the one Universal originally envisioned," the group said in a statement.

The FTC said the Universal buy of EMI did not necessarily change the digital landscape because leading streaming service already need the music of every major label to be competitive.

"Because each major (music company) currently controls recorded music necessary for these streaming services, the music is more complementary," wrote Richard Feinstein, director of the FTC's Bureau of Competition.

Feinstein also noted that the asset sales required by European regulators would reduce concentration in the U.S. market as well.

POTENTIAL BUYERS

Rivals Warner Music Group and BMG - which is owned by German media group Bertelsmann and private equity group KKR - are expected to have the edge in acquiring the assets because of their financial resources and music expertise.

A source familiar with Warner's thinking said the European Commission told Universal it would have to sell at least two-thirds of the package to a single buyer.

Warner is the world's third-biggest recorded music company, behind global No.1 Universal and second-place Sony.

The EU watchdog said buyers must be active record firms or those with a proven track record in the music industry, ensuring there would be a strong rival to Universal.

Virgin founder Richard Branson and Sony Music are among those eyeing the assets, sources have told Reuters.

Goldman Sachs and BAML are advising Vivendi on the disposals.

"These divestitures may lower the future value of synergies, but also reduce the net financial commitment in 2012, when group debt is under scrutiny by rating agencies. So Vivendi may not be so unhappy, after all, from having to give up these assets," said Bernstein analyst Claudio Aspesi.

On the block will be the Mute, Ensign and Chrysalis labels, EMI Classics, Virgin Classics, EMI's share of the "NOW! That's what I call music" compilation business, and EMI units in France, Spain, Belgium, Denmark, the Czech Republic, Poland, Portugal, Sweden and Norway.

In addition, Universal will sell its brands Sanctuary, Co-Op Music Ltd, King Island Roxystar, MPS Records, its share in Jazzland, and its Greek unit.

The company also pledged not to include "most favored nation" clauses in deals with digital customers for 10 years. Such clauses bar its customers from offering more favorable terms to rivals.

"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," EU Competition Commissioner Joaquin Almunia said in a statement.

The combined Universal/EMI will have a market share below 40 percent in Europe after the asset sales, a threshold which typically prompts regulatory concerns.

(Additional reporting by Leila Abboud in Paris and Sophie Sassard in London; Editing by Rex Merrifield, Mark Potter, Bernadette Baum, Phil Berlowitz and Richard Chang)

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