Universal Could Be On A Loser

An opinion piece posted by Reuters reckons Universal’s $1.9 billion acquisition of EMI’s recorded music business isn’t looking as tasty as it did when the binding offer was made.

Business analyst Jeffrey Goldfarb argues that the Vivendi-owned company might be better off if the European Commission blocked its takeover of EMI.

He says recent reports that Universal is willing to offload Parlophone, the label that’s home to Coldplay, Lily Allen and Pink Floyd, means the company has now offered to shed euro 360 million ($440 million) of recording, merchandising and other revenue.

He says that stacks up as 28 percent of EMI’s £1 billion ($1.6 billion) sales for the year that ended March 31, 2011. EMI’s EBITDA over the same period was about $260 million and Universal anticipated $160 million of annual cost savings.

ssuming profit and synergies are proportional to revenue, Goldfarb’s figures indicate that the EMI businesses Universal would actually keep hold of are worth about $530 million less than the deal price.

The other problem is that Citigroup, which seized EMI when UK private equity firm Terra Firma couldn’t service the loans it needed to buy the company in 2007, forced Universal to take the regulatory risk.

So Vivendi has to fork out 90 percent of the $1.9 billion price tag in early September, regardless of whether it has regulatory approval.

Goldfarb also points out that Universal is paying about seven times EBITDA for EMI, or 4.5 times adjusted for synergies. If it could dispose of the requisite EMI pieces for 4.5 times EBITDA, it would recoup about $330 million.

The net result, he says, would mean that Universal would be about $200 million out of pocket.

If Universal ended up shedding 40 percent of the EMI business and losing 60 percent of the synergies it hoped for, Goldfarb calculates the hit as being well more than $400 million.

Goldfarb’s figures would be made marginally worse by the news that on Aug. 7 EMI reported a pre-tax loss of £349 million ($544 million), which is better than the £529 million it dropped last year. But £372 million of it was due to a writedown on the value of its recorded music and publishing operations.

However, if the EC nixes the Universal-EMI deal, then Citi would need to put EMI up for auction again. If the U.S. banker secured a new sale at six times EBITDA, it would bring in around $1.6 billion.

Vivendi would collect that amount and never pay the last 10 percent of the original price.

Overall, the French group would be out nearer $150 million, excluding the cost of the numerous advisers and lawyers that have spent nearly eight months working on the deal.

The Daily Telegraph says there’s every indication that the European Commission may well require Universal to make even more disposals, citing the fact it’s sent a detailed questionnaire asking music industry rivals if they are satisfied with the nature and type of businesses it’s proposing to sell off.

The questionnaire, which is believed to run to 30 pages, asks for opinions on whether the divestment package will be sufficient to restore competition in the European market.

If enough companies object, it could significantly delay the deal or mean Universal having to give up more lucrative artists and risking the scenario described in Goldfarb’s argument.