Warner/EMI’s duet

New media possibilities drove music deal, they say

The two newly designated chiefs of the proposed Warner/EMI music powerhouse stressed Monday in an exclusive conversation with Daily Variety that what powered the deal was the possibility of delivering music directly to consumers via new and future technologies.

Warner Music Group chair/CEO Roger Ames and EMI Recorded Music chair Ken Berry will become CEO and chief operating officer, respectively, of the new Warner EMI Music firm.

“With our merged portfolio of sound recordings and copyrights, it’s obvious that new media will play a significant role in the growth of this new company,” Berry said.

“But it’s not just the size, it’s the quality,” he emphasized.

“Actually, it’s the combination of these two incredible talent rosters and equally incredible executive teams that will ultimately lead to the growth of the company,” Ames asserted.

No competish?

Berry dismissed speculation that other media firms — notably Germany’s Bertelsmann — may enter competing bids for EMI as “urban myth.”

As for any potential stumbling blocks raised by the new company’s reputed one-third share of the global publishing market, Berry said: “That data is very difficult to determine. The estimates are extremely diverse.

“There are obviously a large number of issues that we anticipated would raise regulatory questions — and the process is just beginning — but we believe we shouldn’t have any major problems. This was a complex negotiating process that’s taken well over a year.”

Listed in London, Warner EMI Music will have debt of about $3 billion, with some $1.5 billion passed down by each partner; combined revenue of $8 billion; and cash flow of more than $1 billion. Online retailing for the new company could come to $500 million in three years, execs of the new company said.

As for EMI, those shareholders who expected a juicy takeover bid with a fat premium may have been disappointed and could bail in coming days unless a counteroffer emerges. Many others, however, appreciate the combination and the potential, finally, for significant stock price appreciation. The deal is expected to close in the second half of 2000.

The giant new company — EMI has about 10,000 employees, Warner Music nearly 12,000 — will likely cut some 3,000 jobs over the next three years, mostly in backroom functions, Berry said during an earlier conference call. Lower overhead and a melding of manufacturing and distribution operations will help the new group eliminate some $400 million in costs in three years.

Label stable

Berry claimed that there wouldn’t be a large reduction in repertoire, although “there will be a review of our repertoire and some degree of rationalization.” Similarly, the company will look closely at its label structure but plans to keep all the major labels intact.

Shares of Time Warner dipped in rocky New York trading Monday, while EMI stock rose 11.3% in London. Wall Streeters all like the deal from a Time Warner perspective, but noted that the giant conglom’s music business is such a relatively small part of the recently announced AOL/Time Warner acquisition equation that it wasn’t likely to affect the parent company’s share price.

The structure is particularly pleasing in that a separately traded music stock gives execs a bit more incentive to boost performance. “I’m sure Mr. Ames will get stock options in EMI Group, which is a much better way to incentivize him than stock options in AOL,” one analyst said.

In fact, the joint venture agreement allows Time Warner to buy an 8% stake in EMI Group if that company’s stock hits or exceeds £9 for any 15 out of 30 consecutive trading days within 3-1/2 years from when the deal is completed.

“This is a better structure than a takeover,” said Time Warner chair-CEO Gerald Levin. “There will be a U.K.-based, London Stock Exchange company that will be a surrogate for this business.” Levin ruled out the possibility of Time Warner moving to take over EMI outright once its merger with AOL is complete.

He and other execs on the call also denied that the combination creates a leviathan that may reduce diversity in the music business, saying the market is growing so fast that the merger is only an attempt to keep up. The new company boasts 2,500 artists, releases 2,000 albums a year and owns more than 2 million song copyrights.

Levin insisted that the digital revolution gives everyone “ease of entry” to communicate with consumers.

While news of the merger set Midem participants buzzing, with many concurring that further consolidation — driven by a need for Internet content — is likely, EMI senior VP for new media Jay Samit predicted that the move will spur a major push into digital distribution that would lead to “more and more artists reaching people in more ways — and that’s what it’s all about.”

(Adam Dawtrey in London and Erich Boehm in Cannes contributed to this report.)

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