London-based EMI group is being split in two after 80 years as an independent British music company after finally reaching a $4.1 billion deal with Sony and Vivendi’s Universal Music.
While a consortium led by Japan’s Sony said it won the auction for EMI’s music publishing operations for $2.2bn, Vivendi’s Universal Music Group won EMI’s recorded music auction with a $1.9 billion offer.
Sony lined up Blackstone Group, Abu Dhabi’s Mubadala Development Co, and Raine Group as financing partners for the publishing deal valued at $2.2bn. Sony’s successful bid for EMI is its biggest acquisition since 1989 when it bought out Columbia Pictures for a total cost of $4.9bn.
The record label that for 80 years brought the world everyone from the Beatles and Queen to Coldplay and Katy Perry was auctioned off by Citigroup Inc., which took control of the company after its previous owner, Guy Hands’ buyout shop Terra Firma, defaulted on loans owed to the investment bank.
While Citigroup had earlier suggested it was seeking in the region of $3bn to $3.5bn for the label, the better-than-expected $4.1bn in total deal value approaches the break-even level, something few observers thought possible.
Both bidders were victorious, coming from behind in the auction's final week after nearly five months of intense negotiations, trumping bids by rivals Warner Music Group and BMG.
Citigroup provided £2.6bn pounds ($4.2bn) of debt to Terra Firma’s 2007 leveraged buyout of EMI but had to write off most of the loans as a result of the company's struggles.
Citigroup declined to comment on the matter.
WARNER WALKS, SONY RISES
Warner Music led the bidding on the recorded music side for much of the auction, while KKR-backed BMG was ahead on the song catalog side. But in a surprise move, Warner Music rescinded its bid last week after failing to agree to terms for taking over EMI's pension liabilities.
Warner’s exit opened the door for Universal to return to the negotiating table after previously dropping out of the auction for the very same reason.
Under the deal’s terms, Universal assumes the regulatory risk – and getting the deal approved won't be easy – while Citigroup retains all of EMI’s roughly $600mn in pension liabilities and any potential liability from lawsuits related to Terra Firma’s ownership, a source involved in the deal said.
The $1.9bn price equates to a cash flow multiple of seven times, which is roughly in line with the 7.3 times cash flow multiple Len Blavatnik paid in his $3.3bn deal for Warner Music in July. Cost synergies are expected to lower the cash flow multiple to 5 times, said a source.
But what really put its offer over the top was a last-minute assist from investment bank UBS, which agreed to provide it with more than $1bn in financing, according to two sources involved in the deal.
Billionaire music and movie mogul David Geffen also invested $50mn in mezzanine debt to help Sony finance the deal, said a third source with knowledge of the situation. Those two late investments allowed Sony to raise its offer and trump BMG.
Both deals are expected to attract intense regulatory scrutiny, as Universal is already the worldwide market share leader in recorded music and Sony will catapult to the No. 1 position in publishing.
The deal, if approved, would increase Universal's recorded music market share to 36 per cent globally. In the US, the world's largest music market, the combined company would control 38 per cent of the market. More concerning to regulators, however, is the fact that in some European territories Universal's market share would be in excess of 50 per cent.
Though Sony will jump from fourth to first place in music publishing – owning the rights to around 3 million songs including the iconic hit "New York, New York" and Adele's recent smash "Rolling in the Deep" – its deal is structured in a way that would make it more palatable to regulators.
Instead of an outright purchase, Sony is only a minority partner, meaning that it won't consolidate revenue or debt from EMI on its books. Rather, it will administer the catalog, or find commercially viable ways to license EMI's songs, in return for a management fee, according to two sources.
Even so, Impala, the trade organization that represents Europe's independent music companies, issued a statement saying it will lobby for both deals to be blocked outright. Universal has already offered to sell more than $500 million in assets to appease regulators, but Impala said that wasn't enough.
Though Impala has successfully lobbied to block major music deals in the past, most notably Warner Music's attempt to buy EMI a decade ago, sources dismissed its concerns this time around.
These sources said the music industry is much weaker and more fragmented than it was a decade ago and that stronger companies are needed to help protect and promote artistic talent. They also cited the rise of powerful distributors like iTunes, Google, and Amazon, which together account for about 80 percent of music sales, as the principal price setters in today's market.
Indeed, the fact that Universal agreed to assume the deal's regulatory risk, which would require it to find another buyer and absorb any losses if the deal is rejected, suggests that it believes it will secure approval, sources said.
Even before Terra Firma bought EMI, the company had been so poorly managed that its initials were derisively said to mean "Ever Mistake Imaginable."
But Guy Hands' stewardship drove EMI further into the ground. Hands, an investor known for turning around bars and gas stations, immediately alienated artists and executives alike with brash proclamations that they knew little about running a business. He slashed budgets, cut staff, and upset cultural sensitivities. Radiohead, Paul McCartney, Robbie Williams, Coldplay, and other artists either left the label or spoke out in protest against Hands.
“(We will) replenish and rebuild the rosters that have lacked the level of investment that frankly a business like this should have had. EMI is not a utility company,” Lucian Grainge, head of Universal, told reporters on a conference call in a slap at Hands’ mismanagement of EMI.
Even Mick Jagger weighed in on the deal, saying, "This is a very positive development and I particularly welcome the fact that EMI will once again be owned by people who really do have music in their blood."
BRONFMAN LOSES, BANDIER WINS
Losing EMI to Universal is a defeat for Edgar Bronfman Jr. The Warner Music chairman and scion to the Seagram's beverage fortune, has been trying to buy EMI for years, but control issues always stood in the way of a deal. After Blavatnik bought Warner Music in July, Bronfman moved into the chairman role with the sole purpose of completing his long-sought after deal for EMI.
But, according to a source close to Warner, Bronfman has no regrets about losing the deal based on the price Universal paid.
"Anyone can win an auction," this source said. "But it takes immense financial discipline to walk away from one you've been after for a while because the economics didn't make sense."
On the publishing side, the deal reunites Sony's Martin Bandier with the asset he helped build into a powerhouse during his 18 years at EMI. Bandier was eased out of EMI in 2007 and he joined Sony that same year with ambitions to eventually buy the division he led for nearly two decades.
The publishing win is also a validation for Sony CEO Howard Stringer. Stringer, who has been criticized for allowing Sony to lose its leadership position in consumer electronics and other areas, in 2005 made a commitment to the company's music unit, particularly its publishing unit. The EMI deal represents the unit's fourth deal in six years, increasing its value from around $500 million to more than several billion dollars.