EMI Faces the Music After Debt Demoted

By | March 13, 2003 at 12:00 AM

EMI Group, home to stars from the Rolling Stones to Norah Jones, came under more pressure to find a suitor on Wednesday after its debt was slashed to “junk,” sending its shares to their lowest level in more than 10 years.

EMI, the world’s third-largest music company, saw its stock slump 13 percent after Moody’s slashed its debt below investment grade late on Tuesday on concerns about the weak outlook for the music industry, stoking fears about the group’s profits and dividend.

Faced with an increasingly gloomy outlook, EMI has been in talks in recent months with two rivals – Warner Music and BMG – about teaming up as music sales continue their precipitous decline, sources close to the companies say.

All three companies have declined to comment.

EMI shares, which have already fallen 40 percent since the start of the year, fell 13 percent to 80-1/2 pence in London, just off a new low of 80 pence. By contrast, the European DJ Stoxx media index was 3.5 percent lower.

“EMI is in a bit of a bind, and the share price is reflecting that. They don’t have many options, and finding a buyer or teaming up with a rival is looking more and more like its only real choice,” said one London-based analyst.

Global music sales are estimated to have fallen 10 percent last year and are expected to fall another six percent this year as rampant piracy and weak economies bite into sales.

After a grim Christmas, some analysts said EMI could be forced to give an update on its trading performance ahead of full-year results in May. EMI declined to comment on whether it would issue a trading statement before its closed period starts at the end of March.


EMI, whose artists also include UK pop star Robbie Williams and country singer Garth Brooks, has been in talks with AOL Time Warner’s music arm, Warner Music, to explore ways of marrying their music empires, sources have said.

EMI has discussed buying Warner Music, with the help of a private equity house, but talks remain “informal,” sources say.

The music company has also held talks with BMG, part of German media group Bertelsmann, sources say.

By teaming up with a rival, EMI could cut costs significantly – a crucial point as it navigates an industry with such grim prospects.

Moody’s, which cut its rating on EMI debt two notches to “Ba1” from “Baa2,” said declines in music sales would push EMI’s profits lower in the coming years.

“EMI will not be in a position to generate cash flows from its operations sufficient to support an investment grade rating for the next couple years,” Moody’s said in its report.


Analysts said the Moody’s downgrade raised concerns about EMI’s dividend, which was halved in 2002. Some analysts said it could be cut in half again for the year to end March 2003.

EMI may also look to sell assets such as its manufacturing operation and property to cut debt, analysts said. However, some noted that EMI had already tried and failed to sell its manufacturing and distribution business.

Seeking to reassure investors, EMI said the debt downgrade would not hit its liquidity and would only affect its annualised interest charges by up to eight million pounds ($12.9 million).

EMI warned in November that revenues at its core recorded music unit could fall as much as six percent in 2002. But after slashing jobs and scaling back its roster, the company is expected to show a stable performance on the profit front.

Beyond that, analysts are pessimistic.

“While a lot of negative news is already in the shares, we see ongoing risk (rating and forecast), given continued music industry declines,” said Merrill Lynch analyst Brett Hucker, who cut his 2004 earnings-per-share forecast to 17.3 pence from 18p.

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