Majors And Indies In Record Turmoil

The world’s recorded music business may still not have reached the peak of its turmoil, with Sony and BMG trying to hold their marriage together, EMI telling Warner Music it doesn’t want to date and the indie music companies at odds over who they want to usher up the aisle.

In fact, the disagreement between the indies has now reached the point where AIM – the U.K. independent record labels’ organisation – is in crisis, and the position of chairman and chief exec Alison Wenham is beginning to look tenuous.

The problems have been caused by European indies organisation Impala’s announcement that it will support Warner’s purchase of EMI given certain provisos.

One of the provisos involves Warner giving the indies a bundle of money to fund Merlin, their recently launched digital-licensing and anti-piracy group.

That has led to accusations that the Impala board has sold out. Also, Ministry Of Sound – the U.K.’s largest indie label with sales of more than 2 million units a year – has demanded the immediate resignation of the Impala executives responsible for making the decision to back the deal.

MOS said it wasn’t canvassed on whether it would support the deal, which may well be the result of some stock exchange rules forcing Impala to release a press release faster than it wanted.

EMI was obliged to notify the London Stock Exchange (LSE) about the latest Warner approach and Warner was forced to respond by owning up to the fact it had reopened talks.

About four hours later, Impala released a statement saying it supported the deal given certain conditions. It seems to have had little choice as Warner had already mentioned the fact, but it now appears that release went out before the organisation’s U.K. wing had fully canvassed its members on the matter – hence the outcry from MOS.

The indies deny this was the case, but that denial is losing credibility by the day, considering they held two board meetings in a bid to smooth the troubled waters.

After the second board meeting (March 6th), AIM still hadn’t got its board to ratify its support of what Impala and Warner have agreed.

MOS sent an open letter to AIM executives urging them not to ratify the agreement, claiming it was not only unconstitutional but had not been disclosed or discussed in advance in any detail with the AIM board or members.

The AIM executives have since sent a six-page response to MOS, but they’re still caught in an impasse with Impala that looks as if it will get worse before it gets better.

AIM put out a press statement that said it chooses not to conduct its business in the same manner as MOS and, rather than respond with an open letter, it’s sent this six-page response direct to Ministry of Sound’s lawyers.

Another can of worms has been opened by the fact that many members of the Merlin board, which will benefit from the Warner money, are also on the Impala committee that negotiated the deal with the major.

It’s by far the most divisive ruck that AIM has encountered in its nine-year history.

Impala has reached an agreement, which AIM has had no involvement in negotiating and Impala refuses to allow the AIM members to see the terms that Impala has agreed.

Wenham’s room for maneuver is severely restricted by an Impala gag order that prevents the AIM board from discussing the terms of what’s already a binding agreement with their members. They’re not allowed to seek their own legal counsel as directors with a fiduciary duty to their members.

In fact, the board members aren’t even being trusted to take a copy of the deal terms out of the AIM offices for their own perusal.

At press time, it was hard to say whether it’s more likely AIM will end up being shoved aside by Impala, be forced to quit the European umbrella organisation because it can’t get its board to ratify the decisions that have been made in Brussels, or everyone will realise that, despite the weighty principles involved, both sides have time to shelve the issue and take more time considering it at a later date.

The Sony BMG deal up for further scrutiny from the European Commission (EC), which approved it in 2004 and then had the European Court of First Instance throw the judgment back in its face a couple of years later, has been more than enough to put EMI off even thinking about selling out to Warner anyway.

On March 2nd the British company, the world’s third-largest music group, announced it had received a "non-binding proposal" from the U.S. company, indicating it may be prepared to make a 260p per share offer provided it’s pre-conditional on regulatory clearance.

It’s way below the 320p per share Warner was prepared to offer unconditionally last summer, but that was before the European Court told the EC to take another look at Sony BMG and long before EMI started making profit warnings on a regular basis.

It’s also way below the 310p per share that private equity group Permira offered just before Christmas, and that was a bid that wouldn’t have troubled the regulatory authorities.

When Warner and EMI were in talks in the summer, it was said that joining the two companies would produce £200 million in savings.

The figure will be no longer be that high when EMI chief exec Eric Nicoli has finished taking the sword to his own company’s cost base and making considerable savings of its own.

Apart from that, taking a Warner offer of 260p might well have the analysts and business writers theorizing on how the London-based company has cut its capital value by nearly 20 percent (50p a share) within the space of a couple of months.

There have been reports that Warner and EMI could hammer out a break-fee clause whereby Warner pays a certain amount to the U.K. company in case regulators annul a merger, which could be another way for the U.S. giant to mitigate its risk.