Regulatory Brick Wall

If Warner or any of the other major music companies make a move for EMI, they’d face “a regulatory brick wall,” indies organisation IMPALA warned.

In 2008 the Brussels-based independent music companies’ organisation overturned the European Commission’s initial decision to allow the Sony-BMG merger.

There’s been global speculation that Len Blavatnik’s Access Industries’ $3.3 billion purchase of Warner is a precursor to the American company entering a bidding war for EMI, which U.S. bank Citigroup recently seized from Guy Hands’ Terra Firma.

“As many commentators have recognised, if one of the market leaders Sony or Universal were to make a move, they would meet a regulatory brick wall,” IMPALA executive chair Helen Smith explained in a statement issued hours after the Warner announcement.

“Any attempt to combine EMI with Warner would similarly be blocked unless there are substantial remedies to solve the competition problems of going from four to three majors,” she said.

If the speculation about a future Warner-EMI merger is correct, the market share of the majors would be controlled by three companies. The EC would have to investigate any merger, as would the U.S. and other regulatory bodies.

The EC traditionally takes the toughest stance amongst the regulators. It has already issued warnings in previous decisions about the power of the market leaders. It is expected that the market leaders Sony and Universal would not be allowed to get any bigger, no matter how they attempt to structure a merger.

Previous attempts to merge the two music firms have ended in failure.

They began in 2000, when the EC found that the merger should not be allowed without remedies – a stance that lead to both parties walking away.

In 2007 Warner and IMPALA agreed a set of remedies for its possible merger with EMI, but on that occasion it couldn’t agree to commercial terms with the English company.

IMPALA’s statement welcomes Access Industries’ purchase of Warner and the “new investment into the sector,” but also calls on the company to work with independents on market recovery.

It identifies four key issues facing the sector, which are making access to music as easy as possible, investing in new talent, recognising the value of music and finding ways to level the playing field between the independents and the majors.

Blavatnik’s successful bid will be welcomed by Warner boss Edgar Bronfman Jr., who is likely to keep his job under the new owner.
The all-cash, $8.25-a-share purchase is likely to encourage Citi to start the sale of EMI as soon as possible.

The other bidders for Warner Music are believed to have included the Gores brothers – Tom Gores runs California-based Platinum Equity, while his brother Alec runs Gores Group – and a joint bid from Sony, billionaire Ronald Perelman and Guggenheim Partners.

Warner’s board expects the Access deal to be completed in September. The UK’s The Independent has raised questions about how the new owner hopes to make money from Warner, given that it has registered losses for eight quarters in a row in an industry struggling to deal with digital consumption of music.

“The industry is at a point where digital adoption is rapidly gaining momentum,” was Access head of media Jorg Mohaupt’s explanation. “Warner Music, as one of the most progressive forces in the business, is well positioned to capture this opportunity.”

Warner’s fourth-quarter earnings report was due May 10.