EMI concerns grow at Warner Music

NEW YORK (Reuters) - Declining profits and growth at EMI Group Plc EMI.L are becoming "increasingly problematic," said a large shareholder of Warner Music Group (WMG.N), which is pursuing a bid to buy EMI.

"We want to be very realistic about what we would be buying and what we could do with the company, (as) the base level of profitability and the growth becomes increasingly problematic," said Scott Sperling, co-president of Thomas H. Lee Partners, speaking at the Reuters Hedge Funds and Private Equity Summit in New York on Tuesday.

Britain's EMI rejected a 2.1-billion-pound ($4.1 billion), or 260 pence per share cash takeover proposal from Warner Music Group last month, saying the price was inadequate and not in the best interests of its shareholders.

Thomas H. Lee Partners owns 37.2 percent of Warner Music, according to Reuters data. Warner and EMI, the world's third-largest music company and home to Robbie Williams and Coldplay, have made several attempts to strike a deal for at least six years.

Last year Warner, the world's fourth-largest music company and with artists including Madonna and the Red Hot Chili Peppers, offered 320p a share for EMI.

"Clearly that's not anywhere near what you'd want to pay today," Sperling said. EMI issued its second profit warning in as many months in February.

"EMI has announced a series of disappointing results and we don't see it turning around," Sperling said.

Thomas H. Lee Partners, whose namesake and founder officially left the firm last year, is in the process of raising a $9 billion buyout fund. The Boston-based firm focuses on majority buyouts of North American-based companies.

Sperling is a Director of Hawkeye Holdings, Houghton Mifflin Co., ProSiebenSat.1, Thermo Electron Corp., Univision Communications, Inc., Warner Music Group (WMG.N) and several other private companies. THLee Partners was also among the leaders in the $8 billion purchase of European media company VNU last year, now The Nielsen Company.

An investor group led by Thomas H. Lee Partners, Edgar Bronfman Jr., Bain Capital and Providence Equity Partners completed a purchase of Warner Music in March 2004, and later took the company public.

The music industry has struggled in recent years as the growth in legal downloading has not made up for the slide in sales of physical merchandise such as CDs, but EMI has been hit particularly hard, with the poor performance of new releases such as Williams's "Rudebox". Music piracy is also an issue.

"The fundamental demand for music continues to grow," Sperling said, but whether consumers are "going to pay for it or steal it is the question."

WARNER-EMI AWAITED...

Despite regulatory uncertainties and the years of disagreement, Sperling believes a merger between Warner and EMI makes sense.

The music industry is currently made up of a complete, very expensive infrastructure for physical distribution of the product and a new infrastructure that's been built around digital distribution, he said, with digital more profitable.

"If you look at the ability to scale a combination of Warner and EMI so that it's roughly equivalent to Sony-BMG, what you would have is a company that's able to eliminate some of the duplicative parts, particularly on the physical side's cost structure and that's highly accretive to the shareholders of both companies," Sperling said.