* Must sell assets making up 30 pct of EMI revenue
* EU Commission says potential buyer must be strong rival
* Warner, BMG seen in running for EMI assets
By Foo Yun Chee and Diane Bartz
BRUSSELS/WASHINGTON, Sept 21 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.
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
"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 favoured
nation" clauses in deals with digital customers for 10 years.
Such clauses bar its customers from offering more favourable
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.