The EMI Deal: Change Fuels Optimism

Industry fireworks were generated last week by the sale of EMI’s recorded music and publishing companies for a total of $4.1 billion to Vivendi SA’s Universal Music Group ($1.9 b) and a consortium led by Sony Corp ($2.2 b). Now a week later, let’s take a look at what we know, what we expect, and perhaps a quick glimpse into the future.

EMI Music Publishing was sold for $2.2 billion dollars to a six-member consortium led by Sony Corp. This throws EMI’s 1.3 million copyrights under the Sony umbrella giving Sony, previously the world’s fourth largest publisher (Universal Music Publishing, EMI Music and Warner/Chappell) a strong shot at becoming No. 1. Sony, which put $325 million into the $2.2 billion deal, will administer EMI and own 38% of EMI Music Publishing. The remaining 62% is split between the government of Abu Dhabi, Blackstone Group and the Michael Jackson estate.

But according to the Wall Street Journal, “EMI Music is to remain a free standing entity.” The Journal also offers hope that regulators may not object to the new marriage, “With Sony holding only a 38% interest in EMI Music Publishing, the company might be able to argue to antitrust regulators that the acquisition doesn’t represent undue market concentration.”

The record label deal is partly based upon Universal’s expectation it can profitably exploit EMI’s extensive back catalog which includes acts like The Beatles. Independent labels immediately objected to the pairing hoping/predicting that regulators will squash the planned marriage which would give Universal almost 40% of the global market share. (Sony Music is No. 2 with 29%.) According to WSJ, Vivendi has promised to “dispose of $680 million of noncore assets.”

Looking back at recent history, the original sale price for the combined EMI entity was $6.3 billion to Terra Firma. Reportedly the venture capitol firm added another $700 million or so along the way. Citigroup held a note for $5 billion from that transaction which they ultimately wrote down to $3+ billion in order to facilitate the recent sale. Quick math shows that the value over the past few years for music industry assets has fallen, in this case by at least a third. Some people are asking if in fact Sony and Universal may have overpaid.

A recent Financial Times article concludes, “Vivendi seems to have picked up EMI for a relatively attractive price. At least it is paying a lower headline multiple of about seven times this year’s earnings before interest, tax, depreciation and amortisation for EMI’s recorded music (without the pension liabilities) compared with the 8.3 times ebitda that Russian-born oligarch Len Blavatnik paid for Warner’s recorded music and publishing assets over the summer.” The publication sees a “tentative recovery” taking place based upon sales numbers this year plus optimism over the possible positive effects of cloud technology debuting from Apple, Google, Amazon and others.

One of the benefits to Universal conveyed by the deal is the advantage of size. FT notes that “When it comes to negotiating royalties for its content with the likes of Apple, Amazon or Google, it does make a big difference if you have 36 per cent rather than 25 per cent.”

Top Vivendi execs CEO Lucian Grainge and CFO Boyd Muir both called the new acquisition, “financially compelling.” According to the Hollywood Reporter Muir told analysts at a recent meeting the company’s goal is to reap “at least 100 million euros in cost synergies and 500 million euros ($685 million) in divestitures of non-core existing UMG assets. He said the EMI deal was  ‘financially compelling’ and would be immediately accretive to UMG’s earnings.”

Looking locally, it is way too early to predict or make sweeping statements about how these deals might change the Nashville industry skyline. The acquisitions, if approved, will likely take 6-9 months to close. Going forward, post deal, there would be three majors, Universal (39% market share), Sony (29%) and Warner Music (19%). Typically, when corporations combine resources, they tend to centralize back office functions but maintain  divisions which add competitive energy and revenue. They also work to cut costs and eliminate duplication overall.

The past decade has been chaotic for the music industry with album sales tumbling over 50% forcing waves of consolidation and downsizing. As the industry pares itself to a size that allows it to compete more effectively, we can also look up toward the clouds and see the beginning of a new “access/subscription” model that holds great potential for artists, labels and consumers.

Perhaps we are entering a new era. The passing of a grand marquis like EMI is cause for sadness and nostalgia, but it may also signal a stronger future. Is the business of music more important than the music? I think not. So if we have to reinvent and reshape the business to better fit the music, artists and consumers it’s created to serve, then ultimately change is a good thing.