Vivendi/EMI deal hits right notes for bankers

Andrew Edgecliffe-Johnson Finanacial Times 09/06/12

Barring any further mishaps, EMI – the British music company behind The Beatles, The Sex Pistols and Katy Perry – will shortly pass into French hands.

Ten months ago, Vivendi’s Universal Music stunned rivals by bidding £1.2bn for the record business. Until then, regulators had frustrated most attempts to consolidate the piracy-hit industry, so few imagined that the market leader would attempt a combination with EMI, which jostles with Warner Music for the number three slot, behind Sony Music.

But, when Citigroup auctioned off the asset it had seized from Guy Hands – whose ill-fated buyout it had bankrolled five years earlier – Universal outbid Warner, EMI’s most frequent dance partner, and a host of rival suitors.

If, as expected, European competition commissioner Joaquín Almunia clears the deal, with concessions, by September 27, Universal and Vivendi will no doubt celebrate. However, their victory is looking increasingly hollow.

In November, Jean-Bernard Lévy, Vivendi’s then chief executive, pitched his company as “a safe, long-term home, headquartered in Europe” for EMI’s assets. Lucian Grainge, Universal’s chairman and chief executive talked of preserving the legacy of the company that provided the soundtrack to his teenage years in London. “One of the great dangers is that EMI is asset-stripped,” he warned.

Now, Mr Lévy is out of Vivendi. Jean-Rene Fourtou, the group’s chairman, has come in over Universal executives’ heads to handle negotiations in Brussels. And the asset-stripping of EMI looks imminent.

To get the deal past European authorities, Universal has had to agree to a list of disposals far beyond Mr Grainge’s original pitch. Most of the Parlophone, Mute, Chrysalis and Ensign labels will be sold in the UK – sacrificing Pink Floyd, Coldplay and David Guetta.

Classics and compilations businesses will go, as will EMI operations in countries from France to Sweden. Universal has even had to throw in some of its own labels, such as Sanctuary, and licences for the likes of Disney Records.

Brussels wants more, though. So Universal’s latest concession has been to surrender global rights to the rosters and catalogues affected.

Industry members believe the latest disposal package will mean the loss of £250m-£400m of annual revenues. As EMI’s recorded music revenues were £1.04bn last year, Universal could lose more than a third of its target.

“I can only imagine the questions that are going through your mind,” Roger Faxon, EMI chief executive, wrote to staff recently. For Vivendi, though, the question is: can it still make money on the deal?

There is one consolation in having to sell more than expected: Vivendi’s net outlay will be smaller in the short term. Given that the French group has little headroom in its credit rating, and has to write a £1.1bn cheque to Citigroup next week, that provides breathing space.

But bigger sacrifices will make it harder to extract synergies from EMI in the long run. Vivendi said last November that it expected £100m in annual savings. Will this still be possible after selling so much?

Vivendi must also avoid losing money on the disposals, so it needs the coming auction to be competitive. BMG and Warner were outbid by Universal last November. Both are interested in the economies of scale buying some EMI labels would offer. Whether they will match a seven times ebitda valuation they balked at last year remains to be seen.

Warner’s former chairman, Edgar Bronfman Jr, has lobbied hard against Universal’s deal, and bad blood between the two means “Universal would love to sell to anybody but Warner”, according to one person close to the deal. But if Vivendi is interested more in shareholder returns than music business egos, Warner stands as good a chance as any.

A wealthy individual may also find the prospect of Grammys and Glastonbury invitations alluring. US investors Ron Burkle and Ronald Perlman both bid for Warner and EMI last year.

Left with a smaller EMI, Universal’s Mr Grainge must now prove that he can make a return on his parent company’s investment. He is a hard-headed talent scout with a history of hits, but he will have his work cut out.

That leaves Citigroup as arguably the biggest winner, as the bank will recover all of the money it lent Mr Hands. The loan led to five years of embarrassment after the deal went wrong, and costly legal fees for successfully defending Mr Hands’ claims. Universal’s legal bills for its Brussels battle will not be small, either. It seems it will be bankers and lawyers – not music industry suits – who are singing as EMI is broken up for good.

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