EMI faces the music with restructuring

Giant Brit diskery to cut 1,800 jobs

EMI will ax 1,800 staffers worldwide — nearly 20% of its work force — has cast off a quarter of its 1,600 artists and will take more than $340 million in charges in an aggressive bid to return the stumbling British music group to fighting form.

The drastic cost-cutting actions, announced Wednesday by topper Alain Levy at a conference for investors in London, are the culmination of a worldwide evaluation of EMI’s operations initiated when Levy took over the company six months ago.

Levy said half of the 1,800 job cuts have already happened or will happen by the end of the month, while the other half will be completed by the end of September. Roughly 400 of the layoffs will come from the U.S. operation, where EMI has languished in last place among the five majors and its key labels, Capitol and Virgin, have struggled to generate new hits for the better part of a decade.

A large proportion of those cuts will come from EMI’s Music Distribution arm, in keeping with Levy’s plans to trim down and consolidate “non-creative” functions. Among those thought to be leaving is veteran EMD exec VP Gene Rumsey. EMD will also “realign” about 50 jobs, focusing them specifically on artist development.

Virgin Records, which will relocate to New York from Beverly Hills later this year, will bring only about 100 existing staffers eastward out of the current total of slightly fewer than 200. Capitol Records, which laid off about 60 employees in the fall, could lose as many as two dozen more. Capitol Nashville will be hit with an undisclosed number of cuts, but jazz and classical labels Blue Note and Angel are so far expected to be spared the knife.

Cost cut focus

North America, as a whole, will constitute only 27.4% of total staff cuts, but Levy said almost half the planned $140 million in annual cost savings will come from the region because salaries and operating overhead are far higher here than in other territories. He added that top execs hired since Levy took the reins have accepted pay packages with lower salaries and higher merit-based incentives.

Levy said he expects the moves to help EMI’s Recorded Music division hit operating-margin targets of 11%- 13% within three years. They also expect to boost EMI’s market share by 0.5 to 1.5 percentage points.

“This is not just a cost-cutting exercise,” Levy said at the conference, also attended by chairman Eric Nicoli and EMI division chiefs from around the globe. “This is reshaping EMI for the future and positioning it for growth with a much lower cost base.”

Levy has already made several restructuring moves, stocking the executive suite with creative vets and paying $28 million to buy out an ill-fated record deal with diva Mariah Carey.

Wary of big advances

In a thinly veiled reference to the original $80 million Carey deal, Levy sought to reassure investors that EMI would eschew the practice of handing out big cash advances to marquee acts — a tactic that has driven costs higher across the biz. Levy’s predecessor, Ken Berry, inked Carey to EMI’s Virgin imprint, only to have her first album flop while the singer suffered a series of nervous breakdowns. Virgin has done other big-bucks signings over the years, most notably Janet Jackson, George Michael and the Rolling Stones.

Levy said the company will also make drastic cuts in budgets for musicvideos, whose production costs can spiral into the millions for top acts.

Industry watchers called Wednesday’s announcement aggressive but necessary to reverse EMI’s decline during the past few years. Company has been forced to make two profit warnings over the past six months.

“We’re talking about a fairly big swath of the company here, but I don’t think it’s dramatically more than anybody expected,” said Rebecca Ulph, a London-based analyst with Forrester Research. “They’d been afraid of cuts like this because it’s an admission that something’s not right, but the market already knows what trouble they’re in.”

Dividend to be sliced

On the financial side, plans to trim overhead include a 50% decrease in EMI’s annual dividend to shareholders. EMI said it also cut a deal with its creditors to refinance some of the company’s debt load, including a $1.14 billion three-year line of credit and a $714 million bridge loan.

The $340 million in writedowns includes a one-time charge of about $156 million for the layoffs, plus another $184 million to pay for write-offs of assets, money-losing businesses and the massive Carey payouts.

Levy also outlined what he termed “phase two” of EMI’s expected return to prosperity, to be implemented over the next two years. Included in this segment are plans to make marketing and promotion more efficient, update the company’s aging IT infrastructure, as well as develop new channels of distribution, including DVDs and the Internet.

Aggressive online tack

On the latter channel, Levy stressed that labels need to be much more aggressive in advancing their own schemes for online distribution (he expressed dissatisfaction with the current industry-backed efforts, Pressplay and MusicNet) and fighting the proliferation of free music over peer-to-peer networks. He vowed to be more proactive on this front, relying less on industry orgs such as the Recording Industry Assn. of America.

Despite the lower dividend and hefty charges, investors gave their nod of approval to Levy’s plans in the market Wednesday. In London trading, EMI shares added just under 3% to close at $5.01.