Court nixes Sony BMG marriage

In a stinging blow to the music industry, a European Union court has sent Sony and Bertelsmann back to the drawing board to rework the Sony BMG merger.

Move overturns the European Commission’s approval of the deal in 2004.

Ruling orders the commission to reconsider the partnership, with Sony BMG given seven days to resubmit a merger plan. The commission has a 60-day grace period to appeal the court’s decision directly to the EU court.

In a caustic 100-page judgment, the court said that the commission did not provide enough evidence the first time around to support its greenlight. Judgment, handed down by the EU’s European Court of First Instance, described the commission’s “extremely cursory examination” and said it “did not demonstrate to the requisite legal standard” the effect of consolidation on indie labels and the market.

Ruling marks the first time a commission merger clearance has been annulled.

Sony BMG said it did not believe the ruling would keep the company from operating as it does currently. Sony and BMG joined forces two years ago to form what’s currently the second largest music distrib in the world.

The news is also a serious setback to the Warner Music Group and the EMI Group, which have been in an acquisition tango for more than two months and could be scared off by the ruling.

On Thursday there was a more immediate effect for the companies: EMI shares tumbled more than 9% to £2.78 ($5.08) in London. WMG was down a whopping 18% to $24.53 on the New York Stock Exchange.

In a sense there’s a symmetry to the stock drop; acquisition talk was thought to be a main driver of higher stock prices, particularly at Warner. Diskery’s price is now only slightly below where it sat in May, when the acquisition reports began.

The court ruling is a victory for European independent record companies’ trade body Impala, which initiated the case in the European Court. The commission must also pay three quarters of Impala’s legal costs.

Impala has been using its “Creativity… Yes. Concentration… No” campaign to great effect in Brussels. Org is credited with preventing an earlier merger between EMI and Warner.

The European Commission waved through the Sony BMG merger unconditionally in 2004 despite widespread objection from the indie sector that further concentration would have an adverse effect on the market.

Some experts said that Sony BMG now has a weapon it did not possess in 2004: the rise of digital music, which has changed the landscape sufficiently to make a merger tolerable, if not necessary. That argument is what motivated Warner and EMI to try again after being rebuffed by regulators in 2000.

In a statement, Sony BMG said, “Today’s judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004 — after having been notified and investigated by the European Commission under the Merger Regulation. We are studying the judgment carefully and shall discuss the appropriate next steps with the European Commission.”

Both Warner and EMI were unusually cautious in their statements about the ruling — a sharp departure from their recent defiant statements about an acquisition.

EMI Group, which received the news on the same day that its annual meeting was taking place, said: “This judgment is about how the commission undertook its assessment of the Sony BMG case in 2004 and the particular evidence presented in that case. It will require detailed study before any wider conclusions can be reached.”

Warner also said it was studying the decision “to determine what impact it might have on a potential combination of Warner Music Group and EMI Group.”

An insider at one of the companies described legal experts “poring over the ruling like it was the Dead Sea Scrolls” to determine how to proceed.

Even if the companies decide to go ahead, the ruling ensures that the battle will be costlier and more time consuming.

Impala prexy Patrick Zelnik, who called the ruling a “landmark judgment for music,” hinted that the group would be emboldened for another fight. “There is no doubt that it will block any further mergers and will transform how music and other creative sectors are treated,” he said.

Others said the ruling could make finding common ground on the price difficult since both companies now must take into account more extensive regulatory and legal fees in deciding whether an acquisition is worth the effort.

(Gordon Masson in London contributed to this report.)

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