Ripping The Heart Out Of EMI Deal

More UK business analysts are advancing the opinion that if Universal Music Group has to make even more concessions to get regulatory approval for buying EMI’s recorded music business, the Vivendi-owned company may find the deal’s no longer worth doing.

Following Jeffrey Goldfarb’s recent Reuters opinion piece, which suggested EMI is already worth less than Universal guaranteed to pay for it, the UK’s Daily Mail has suggested the European Commission may be “ripping the heart out of the deal.”

The paper’s “This Is Money” section quoted an unnamed “senior Universal executive” saying it’s possible that EMI could be completely offloaded to other bidders.

“If the Commission rips the heart out of this deal then we would lose money on it, but we are not going to do a deal that does not make sense,” the unnamed Universal source explained. “Universal was not the highest bidder for EMI.

We were the only ones prepared to take on the regulatory risk. Some of those other bidders are talking to us about buying assets. We would have no problem selling the whole of EMI but we’re not at that stage yet.”

Universal is hoping it doesn’t get near to that stage as only a month ago chairman and chief exec Lucian Grainge said that he was determined to keep as much as EMI Music as possible, although various analysts have suggested that labels including Parlophone and Virgin may be sacrificed to ease the $1.9 billion deal.

Neither the Daily Mail piece nor the Music Week story that followed it went as far as supporting Golfarb’s view, which says Universal is in imminent danger of losing out on the deal.

Golfarb said if recent reports that Universal is willing to offload Parlophone are true, then losing the label that’s home to Coldplay, Lily Allen and Pink Floyd will mean 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.

Assuming 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.