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Music Execs Expect EMI Deal in '03

Could 2003 be the year that EMI finally finds a mate?

Frenzied gossip among executives at this year’s Midem music industry conference on the French Riviera would suggest so.

As a new group of suitors eyes the EMI dowry, which includes the Beatles back catalog, bets among the glitterati at Cannes are that the world’s third biggest music company will pair up with one of its old flames: BMG or Warner Music.

Yet some still hold out hope for a more dramatic swoop by private equity houses led by an industry guru – cash-rich Clive Calder being one contender after the sale of his Zomba label.

Another playful rumor doing the rounds of seminars and bars is a management buyout of the company, whose roster stretches from oldies the Rolling Stones to newcomer Norah Jones.

What sources close to the companies know for sure is that EMI has been wooed by both BMG and Warner in recent months as it explores ways of beating the industry blues – dwindling sales and struggles to market new talent.

“EMI and BMG have been holding informal talks over the past few weeks,” said one source close to the companies in Cannes. “They’ve been running through the numbers.” Another source said EMI had also been in contact with Warner.

BMG, its parent Bertelsmann and EMI all declined to comment on what they called “market rumors.”

EMI’s battered shares climbed 18 percent in the two weeks to last Friday on hopes that a formal approach could be made by any of the potential Romeos.

But while many industry watchers say consolidation is inevitable this year as music sales continue to slide, some sources say a deal is not imminent. Indeed, some of the steam has come out of EMI shares this week, although the stock was trading up 1.5 percent at 166 pence Tuesday.


Investors are all too aware that EMI has been here before. Despite a list of suitors that would make most girls blush, the British-based music company has never pulled off a deal.

Whether it be Rupert Murdoch, AOL Time Warner or Disney, most media companies have at some point cast an eye over EMI, which ranks as the world’s top music publisher and is also home top pop acts Kylie Minogue and Robbie Williams.

In 2000, EMI tried and failed to merge first with Warner and then BMG. Both deals fell foul of European regulators, who made clear they would not accept that the top five music companies, which control 70 percent of global sales, shrink to four.

So why should this year be any different?

Like its four big rivals – Universal Music, Sony Music, Warner Music and BMG – EMI has suffered severely from the slump in music sales in the past three years.

With youths spending more of their disposable income on entertainment such as video games or downloading music from the Internet for free, global music sales are estimated to have fallen almost 10 percent last year and analysts forecast another six percent fall this year.

EMI shares fell 75 percent over 2001 and 2002 to a 135 pence low, sparking fresh interest from predators such as private equity houses. However, some say it is still too expensive.

“I think private equity needs to see the shares go down to 100-120 pence before EMI becomes an interesting play,” said one executive in Cannes.


All five music majors have been busy slashing jobs, B-list artists and any other costs they can to counter the industry slump. But to cut costs further by any meaningful amount would require a merger with a rival.

In light of the sickly nature of the industry, analysts suggest European regulators could be more open to a merger now.

Some analysts, including Michael Nathanson at Sanford Bernstein in New York, suggest that EMI would be better off with Warner Music given their geographical strengths and strong links between the two management teams.

Nathanson estimates that an EMI/Warner combination would reap $250 million in savings. However, a Warner deal could be more problematic for regulators than a BMG deal given its higher market share and strength in music publishing. The problem for BMG is that it is only just integrating Zomba, the label of ‘NSync and Britney Spears, which it bought from Calder. BMG, which ranks fifth among the big five, is not flush with cash and any deal could see EMI retain its listing.

But such detail is still speculation, sources in Cannes say. Informal talks have so far not explored the exact nature of any deal.

Publicly, EMI says it is happy to stay single for now.

EMI recorded music CEO Alain Levy has spent the past year turning around the sinking ship and has said he wants to see through his efforts before considering any merger.

“It’s one thing to hold exploratory talks, but it’s quite another to do a deal and tackle the regulators. I’m not so optimistic it will get that far,” said one executive in Cannes.

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