And then there were four.
U.K.-based EMI, music’s last major independent player, has been snapped up at last and will pool its business with Warner Music in a new Time Warner-led venture that will rival current industry leader Universal. A Warner Music/EMI combo leaves just four big players; the other two are Sony Music and BMG.
The agreement, to be announced early today, creates a $20 billion company called Warner EMI Music in which EMI and Time Warner will have equal stakes. The giant U.S. conglom is contributing primarily its assets, along with a $1 billion cash payment, to ensure a majority of the 11-member board of directors. That would give Time Warner — and new prospective parent America Online –effective control of the new entity.
Time Warner and EMI spokespeople acknowledged that the two companies were in a final round of discussions but declined to comment further.
Time Warner president Richard Parsons and EMI topper Eric Nicoli will be co-chairs of the expanded company. Recently anointed Warner Music Group chairman Roger Ames will be CEO; Ken Berry, currently CEO of EMI Recorded Music, will be chief operating officer.
The merger comes just over a year after Seagram’s $10.4 billion purchase of Polygram, another European-based music company, that made Universal Music the unchallenged market leader worldwide.
Such combinations can allow for extensive cost cuts and integration of back-office functions. Sources said a new Warner EMI Music expects to see cost savings of some $400 million over three years. But consolidation isn’t necessarily seen as good news for artists and managers, as power shifts back to an increasingly small number of labels.
The latest deal appears to be an unquestionable master stroke by Time Warner, however. It bolsters Warner Music’s worldwide market presence, creates a music publishing powerhouse and makes it much tougher for competitors such as Bertelsmann’s BMG Entertainment to grow, or for potential newcomers such as News Corp. to enter the music business with a splash.
Bertelsmann and News Corp. have both eyed EMI in recent years but always felt a purchase was too expensive. EMI’s stock has fluctuated wildly in response to sporadic takeover speculation. The company is currently worth close to $10 billion. Warner Music, 100% owned by Time Warner and not publicly traded as a standalone stock, is worth about the same, Wall Street sources said.
EMI shares got their latest boost last week after Bertelsmann chairman-CEO Thomas Middelhoff told Der Spiegel magazine that he wants BMG to become the world’s largest music company.
Bertelsmann officials said Sunday that the company has other potential avenues of growth besides EMI. Reports have recently linked BMG with Sony Music. Still, Wall Streeters don’t exclude a counter offer for EMI from the German-based group or another player. “The million-dollar question is: Will Bertelsmann make a run at it? They’ll almost have to,” said one analyst.
Another pressing question is whether EMI shareholders will approve the deal. Aside from the $1 billion cash payment, their company isn’t getting any premium to its current stock price. The holders will own a piece of a much stronger company, however, with impressive growth prospects in both the traditional music business and the burgeoning online universe. Time Warner recently agreed to merge with giant Internet service provider America Online to create a new multimedia behemoth called AOL Time Warner. That deal is expected to close by year’s end.
According to a recent report by Goldman Sachs, the U.S. music industry is expected to grow by about 6.2% a year through 2003, with 25% of that fueled by digital or Internet technologies.
Listed in London
The new joint venture will be listed on the London Stock Exchange, where EMI is currently traded, but not in New York.
Some industry players wondered if the London listing may help protect the new company from U.S. lawsuits or boycotts that could arise from any potentially controversial content found on its recordings. The Warner Bros. label, which at one time distributed Interscope Records and the stable of rappers from its Death Row Records subsidiary, was forced to distance itself from gangsta rap in the wake of the brouhaha that surrounded Ice-T’s “Cop Killer” song several years back.
Warner Music main holdings include three major labels (Warner Bros., Elektra and Atlantic Records) and dozens of subsids such as Maverick, Reprise, Rhino, Lava and Qwest Records.
These labels are home to such stars as Madonna, R.E.M., the Red Hot Chili Peppers, Metallica, Missy Elliott, Kid Rock, Brandy, Neil Young, Alanis Morissette, the Goo Goo Dolls, Eric Clapton and Quincy Jones.
All these are brought to the marketplace though WEA Distribution. The company also sports an alternative distribution operation, Alternative Distribution Alliance (ADA) and music publishing behemoth Warner/Chappell Music, whose holdings range from Cole Porter to Green Day.
EMI houses such notable labels as Capitol, Virgin and Priority, which distributes Master P’s rap powerhouse No Limit Records.
From Pumpkins to Stones
EMI’s roster of recording stars stretches from Garth Brooks, Smashing Pumpkins, Ice Cube and the Beastie Boys to Bonnie Raitt, Radiohead, the Rolling Stones, Lenny Kravitz, Tina Turner and Van Morrison.
The company distributes its labels through EMI Music Distribution (EMD). It, too, sports an alternative distribution arm, Caroline Distribution.
While EMI’s music group hasn’t exactly been burning up the U.S. charts of late, its catalog of vintage recordings from the Beatles, the Beach Boys, Frank Sinatra, Nat “King” Cole, and legendary jazz label Blue Note Records is formidable.
Same goes for EMI’s Music Publishing, which extends from Harold Arlen to Aerosmith.
One possible stumbling block to the merger may be the resulting concentration of music publishing holdings. Adding EMI Music Publishing to Warner/Chappell Music would put more than a third of the global music publishing market under one roof. Wall Streeters and industry insiders said Sunday they expect the deal to undergo intense regulatory scrutiny.