July 25, 2012 / 2:37 PM / in 6 years

Universal seeks EMI solution to please regulators, investors

NEW YORK/BRUSSELS (Reuters) - Universal Music Group has a week to come up with concessions to persuade European regulators to accept a $1.9 billion acquisition of EMI Music labels and is searching for asset sales that will not ruin the deal’s appeal for investors.

A combined Universal-EMI would sell a huge library of current top-selling and legendary artists like Jay-Z, Kanye West, U2, and Katy Perry and the Beatles and control more than one-third of the global market.

Europe’s antitrust regulators want to make sure other labels have a chance to compete, given that the new group would be almost twice the size of its next-largest competitor in Europe.

Owned by telecom-and-entertainment conglomerate Vivendi (VIV.PA), Universal Music is trying to work out a divestment plan with European Commission regulators that could see it give up record labels including Virgin Music, EMI Classics and Chrysalis.

They want to reduce the market share in terms of sales and distribution assets to below 40 percent in several European countries and also curb its market power, two people familiar with the talks said.

Universal Music has until August 1 to submit to Brussels its final remedies to its original proposal.

“It’s true that it’s (the negotiations are) very tough,” EU competition commissioner Joaquin Almunia said on Wednesday, referring to recent negotiations with Universal.

“There will be a lot of work to do looking at this merger.”

Countries where Universal’s market share would top 40 percent after the EMI deal, include the UK, Italy, Spain, Greece, Sweden, while Germany comes close, a third person said, citing confidential November 2011 market data from music industry trade association IFPI.

Regulators are pushing for asset sales from Universal rather than licensing deals because of the difficulty of monitoring such agreements, the person added.


Universal agreed to buy EMI from Citigroup in November 2011 attracted in large part by its big back catalogue of artists like Pink Floyd and Queen. Such older music accounted for two-thirds of EMI’s global sales of £1 billion in fiscal 2011, and it generates higher margins than new artists since promotional costs are lower.

Universal’s global market share of recorded music would rise to 36 percent from 26.5 percent after the deal. Analysts estimate that 35-40 percent of the combined group’s sales would come from Europe.

Rivals to the deal such as Warner Music Group and independent record labels are concerned the combined company would have too much market power, particularly in dealings with the fledgling digital music business.

In addition to the EU review, US competition regulators will examine the deal. Universal Music will meet regulators from the Federal Trade Commission next week, two sources said.

While the EU has blocked a few deals on antitrust grounds in recent years, including the planned merger of Deutsche Boerse and the NYSE Stock Exchange in February, lawyers and analysts expect European regulators to seek concessions from Universal and not block the deal outright.

Getting the deal approved is crucial for parent company Vivendi because under the terms reached with Citigroup, it assumed all the regulatory risk. If the deal is delayed or blocked, Vivendi still has to pay £1.1 billion to Citigroup by September 10.

With Vivendi now in the midst of a broad review of its conglomerate structure to reverse a sustained slump in its share price, it cannot afford a mishap on the Universal deal.

Vivendi is considering ridding itself of some of its businesses, including video games maker Activision Blizzard Inc (ATVI.O) and Brazilian telco GVT, or breaking up the company completely.

“The negotiations with the regulators seem to be progressing, and Vivendi is desperate to do the deal because of the engagement they took on the regulatory risk,” said Conor O’Shea, an analyst at Kepler Capital Markets.

“Vivendi does not want another asset that they have to sell especially now when they are weighing other divestments and some of those talks, such as Activision, appear to be having some initial difficulties.”


A divestment package is expected to be agreed between Universal and Brussels this week after which regulators will do a “market test” over 5 days during which competitors, customers and other interested parties can comment on the proposal.

After that European regulators have until September 6 to give a final decision, but that deadline will automatically be extended by 15 working days if Universal proposes concessions.

The key question for investors in Vivendi is to what extent the concessions the group will have to make to get the deal approved could damage the economic rationale behind the acquisition.

When the deal was announced, Vivendi said it would allow the combined group to squeeze out £100 million in synergies per year, add to earnings in the first year, and be “value generative” by the third year.

Privately, executives at Universal Music believe if the divestment strategy removes a significant chunk of EMI’s European revenue, the deal would still make financial sense since the group would still be able to generate significant cost savings.

It remains to be seen whether Universal Music Chief Executive Lucian Grainge would have to tweak the synergies he hoped to gain as a result of the concessions to regulators.

Kepler analyst O’Shea said he would be a surprised if Universal materially changed its targets for the deal.

“It depends on what they have to sell, and what the final market share threshold will be,” he said.

A London-based equity analyst who declined to be named was more prudent: “The more concessions they have to make, the fewer synergies they will able to take out since the cuts will come off a smaller base. It’s just mechanical.”

Additional reporting by Leila Abboud in Paris and Diane Bartz in Washington DC; Writing by Leila Abboud; Editing by Anna Willard

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