Levy And Munns Booted From EMI

EMI looks to have plunged itself into turmoil by booting out chief exec Alain Levy and vice chairman David Munns in a cost-cutting exercise.

The initial news caused what turned out to be accurate speculation about a profit warning, and shares fell 7 percent to 245p on January 12th.

Executive chairman Eric Nicoli, who is now also acting as chief exec, is pondering a number of options, including leading a buyout with support from private equity, The Observer said.

Some shareholder groups are furious that he’s taken over the company, saying they would have preferred EMI to appoint a new management team to address its numerous problems, The Independent reported.

Nicoli has been at the helm since 1999 and has tried unsuccessfully to pull off a merger with rival U.S. giant Warner Music three times as well as with Germany’s Bertelsmann Music Group.

Last month the board rejected a 310p a share bid from private equity group Permira on the grounds that it undervalued the British company, although EMI’s current price has fallen to about 80 pence below that.

The company dumped Levy and Munns as part of a cost-cutting strategy designed to save £110 million a year, with Nicoli taking over to carry out a "streamlining" that looks certain to include significant layoffs.

Most of the 900 jobs under threat are expected to be in the U.S., where the company’s Virgin North America and Capitol labels are performing poorly. EMI could also pull out of some of its weaker markets in Asia and Latin America.

There was early speculation that Roger Ames – a former chairman of Warner Music and now a consultant to EMI – would come in alongside Nicoli, but the Sunday Times reported that the company has denied this.

If anyone gets to fill that role, he or she will need to confront a business that was complacent when it needed to adapt to digital music.

The company needs to act quickly. The streamlining is likely to come at a one-off cost of about £150 million but EMI is also said to be faced with writing off the same amount because of the decreased value of old recording contracts with artists who never produced the hoped-for sales.

The U.K. major, which is the smallest of the big three or four, isn’t commenting on whether the write-down on contracts could lead to a lot of acts being dropped, thereby cutting the cost base of developing artists that aren’t performing up to expectations.

The payoffs to Levy and Munns are expected to cost up to £10 million.

The main reasons for the re-shuffle looks to be the company’s failure to line up with Warner Music and – more recently – the breakdown of talks with private investors.

But there are other longstanding reasons, mainly caused by stagnant sales.

Top acts including Coldplay and Norah Jones have continued to produce the numbers, but Robbie Williams has under-performed and Janet Jackson hasn’t performed at all.

Matt Serletic, brought in by Levy to turn around the company’s Virgin label and Jackson’s career, didn’t manage to do either and was ousted at the end of 2005.

Her 20 Y.O. album has only sold 600,000 in the U.S., easily the worst sales performance of her career.

EMI has secured bank financing for the restructuring and also to cover the recently announced purchase of the outstanding 45 percent minority interest in its Japanese subsidiary Toshiba-EMI.

According to a company briefing, the streamlining of the company will include the de-layering of its management structure to allow a more focused approach, particularly within the developing digital landscape.

It’ll also mean investing and operating in territories and business areas where superior, secure returns can be generated, and reducing exposure to territories and business areas in which these conditions are not satisfied.

The company statement says this will align EMI’s business more closely to its operating environment, allow a continuing strong focus on artist and songwriter development, re-allocate resources to attractive growth areas, increase the level and certainty of overall return on investment, and significantly improve margins and the generation of free cash flow.