Indies Support Warner-EMI Deal

Warner Music’s latest effort to court EMI was something of a shock to the U.K.’s business analysts until they learned that the U.S. major’s approach had the backing of the indie music companies.

Within hours of reporting that Warner looked to be throwing its hat in the ring and making yet another bid for the beleaguered British company, the independents’ trade organization released a statement saying it had agreed to a three-point plan to support it.

It looked as if the company headed by Edgar Bronfman Jr. had shelved its interest in EMI until the outcome of the European regulators review of the 2004 Sony-BMG merger becomes clear.

The indies resisted that deal and, when the European Commission allowed it, also protested it all the way to the European Court of First Instance.

Having the support of Impala, the independent music companies’ Brussels-based trade organization, doesn’t guarantee regulatory approval for a Warner-EMI deal. But it does at least mean the indies won’t constantly be trying to derail it.

The EC is likely to be concerned that combining EMI’s publishing business with Warner Chappell would give the new company a 35 percent share of the sector, and it’s likely it would want to see some of it sold off.

Impala will apparently back the deal provided WMG makes certain "behavioral undertakings to ensure competition and broad licensing" and sells off some of its own recorded music business in order to reduce its market.

The third condition of Impala’s support is that Warner gives some financial backing to Merlin, the independent labels’ recently launched digital-licensing and anti-piracy group.

An unnamed "industry insider" was quoted telling The Guardian that it’s an "outrageous" bargain and "smacks of an absence of scruples," although Impala president Patrick Zelnick told the paper that the indies haven’t been bought off and insisted that his organisation isn’t for sale.

In an Impala press statement, Zelnick said his organization has been consistent at opposing mergers without strong remedies, and also told The Independent that a market consisting of three majors and a strong independent sector is preferable to having a market where two companies – Universal and Sony-BMG – dominate the shelves.

He also said his organization would attend a February 23rd meeting with the European Commissioners to discuss the Sony-BMG deal, and would use its co-operation with Warner as an example of how the major and independent sectors can find solutions by working together.

The EC may still question why Impala is so set against Sony-BMG and the reduction in the number of majors from five to four, but still finds a Warner-EMI tie-up acceptable.

Last May, the indies said they will "forcefully oppose" any merger between Warner and EMI on the grounds that the new company would control more than one-fourth of all recorded music sales and close to 50 percent of the music publishing market.

The EC is also likely to question whatever "behavioural undertakings" Warner has made, as such measures aren’t easy to police.

The renewed interest from Warner saw EMI shares move up 8 percent February 20th, from 212p to 240p, and rounded off a week when the London company’s financial affairs have hardly been off the front page.

It began with stories saying EMI was believed to be looking to borrow £1 billion or sell off its recorded music business in an effort to gain some breathing space and create a defence against takeover bids.

After issuing two profit warnings within a month and with Warner Music and Permira equity house appearing to have dropped their interest, U.K. dailies including The Times, The Independent, Financial Times, Daily Mail and Daily Express all said the company would borrow to pay its debts, while The Guardian suggested that selling its records business is another option.

According to the FT, finance director Martin Stewart had already told the group’s bankers to see if the steady cash flows from EMI Music Publishing could be used as security to allow the group to replace its heavier debts.

The company will be about £1.25 billion in the red by the time it pays for the restructuring costs that are set to save it £110 million a year. A few key execs had expensive redundancy packages.

It could use some cash to wipe off some of its more expensive loans and the management is hoping that linking borrowing to publishing revenues could save it a further £20 million per year in interest payments.

The logic behind using the publishing wing in this way seems to be that any bid for EMI is likely to be leveraged against its assets, and putting it down as a security will prevent any financial predator from using it as a source to fund a takeover.

Shares in the company that houses Norah Jones, Robbie Williams, Coldplay, and The Beatles dipped to around the 220 pence mark after it warned that its recorded music sales may be down as much as 15 percent.

A month ago, EMI started warning that the numbers would be lower than predicted, but then it was saying the percentage drop would be somewhere within a 6 to 10 percent spread.

Last summer, the private equity group Permira made a 320 pence per share offer, which EMI management rejected on the grounds that there was still a lot of growth left in the English company.

The European Commission may make an announcement on that as early as March 1st, but it’s likely to be another month before the ruling is given.

A new equity house bid may well come from someone other than Permira, which is a company that tends not to revisit old targets.

With the two profit warnings coming within a month of each other, the business pages had begun to speculate over the future of chief exec Eric Nicoli, although he only stepped across from being chairman a month ago and there doesn’t seem to be any obvious candidates to replace him.

One shareholder told The Daily Telegraph that Nicoli is "a dead duck," but if chairman John Gildersleeve and the board didn’t feel he was the right person to drive the restructuring, it’s likely it would have been made clear when Nicoli assumed control.

That first profit warning saw off music chief Alain Levy (with a £3 million pay-off) and his deputy David Munns, who had planned the £110 million cost-saving strategy and then discovered they were part of it.

Other shareholders are supporting Nicoli, with William Claxton-Smith of Insight Investment, which holds 5.8 percent of the EMI stock, saying he didn’t think the chief exec’s position would be undermined by the second warning.

The news of the company’s efforts to restructure its debt would seem to indicate that Nicoli is securely in charge and beginning to set plans in motion to turn the company around.