Record Label Roundup

The music goes round and round: An investment group led by former Universal Music chief Edgar Bronfman, Jr. is in the lead to acquire Warner Music Group (WMG) and Warner/Chappell Music Publishing from corporate parent Time Warner, according to reports issued the third week of November. Bronfman's group—a consortium of banks and venture capital firms—has offered $2.8 billion for Time Warner's musical properties, possibly forcing prior suitor EMI Group PLC to drop out of the bidding. On Thursday, November 20, EMI chairman Eric Nicoll told reporters that Time Warner had informed his company of "a possible proposal from another party as an alternative to our own firm offer."

Bronfman put Montreal's Seagram, Ltd. into the entertainment business years ago when he negotiated the purchase of MCA Records, which became Universal Music with the acquisition of PolyGram. Universal was then sold to French conglomerate Vivendi SA. Should Bronfman's current offer win shareholder approval, Time Warner would retain a minority stake of about 11% in WMG, an investment valued at about $300 million. EMI had reportedly offered about $1 billion in cash, with Time Warner retaining a 20% interest. The Bronfman bid is no sure thing, according to the financial press. Any one of several partners could get cold feet at the last moment and scuttle the deal. An acquisition by EMI would require regulatory approval because it would merge two major companies in the same industry. An EMI-WMG deal would also result in lost jobs at the merged entity, with the elimination of redundant positions.

EMI was riding high just before Time Warner made the announcement that it was considering another offer. The company had reported improved earnings in sales of recorded music for the first half of the fiscal year, with a surprising upturn in its North American business. For the six months ended September 30, EMI posted net profits of £8.8 million ($15 million). That figure was well off the £138.4 million ($235.28 million) posted a year earlier; but deceptively so because last year's figure included EMI's sale of its share of retailer HMV Group PLC, a move that yielded after-tax profits of £136.6 million ($232.22 million). EMI's sales of recorded music this year were £758.6 million ($1289.62 million) compared with £759.3 million ($1290.81 million) for last year, a case of plowing ahead by standing still, considering that the worldwide recorded music market has declined almost 30% over the past four years. On Friday, November 21, shares of EMI dropped by 3.8% on the London exchange following Time Warner's announcement. "This is bad news for EMI,'' said Simon Baker, analyst at SG Securities.

Things have also been looking up for German media conglomerate Bertelsmann AG, which, on November 20, reported a return to profitability in the wake of cost-cutting efforts begun earlier this year. The company has almost halved its debt in the past year, from €2.7 billion ($3.22 billion) to €1.45 billion ($1.73 billion), with much of the savings due to the sell-off of Internet assets. Bertelsmann Music Group (BMG) has been much in the news lately as a probable merger partner for Sony Music Group, a strategy not universally endorsed by Bertelsmann's board of directors.

The previous day, board chairman Gerd Schulte-Hillen announced his resignation, effective January 1, following a vote on the proposed merger. Unlike Bertelsmann CEO Gunter Thielen and fellow board members, Schulte-Hillen opposed the merger. His interim replacement will be deputy board chairman Dieter Vogel, who will serve until a permanent successor is found. Schulte-Hillen's departure will consolidate Thielen's power, according to some observers. An old-school media executive, Thielen took over last year after the resignation of Thomas Middelhoff, an upstart who steered Bertelsmann into the Internet era, including an ill-advised investment in file-sharing service Napster. Schulte-Hillen's resignation was the culmination of long-running disagreement with Thielen and majority shareholders the Mohn family over Bertelsmann's future. BMG could save as much as €300 million ($357.5 million) annually by merging with Sony Music, according to statements made by BMG president Rolf Schmidt-Holtz.