Universal Music-EMI Deal Approved by European Union
Universal Music-EMI Deal Approved by European Union

European Union regulators today formally approved Universal Music Group's $1.9 billion acquisition of the recorded music unit of EMI Music. As expected, the approval is contingent upon divestments to limit the combined companies' market share.

Universal said the assets to be divested amounted to 30 percent of EMI's group revenues (approximately 10 percent of sales for the combined group), according to Reuters. As expected, it will sell Parlophone (minus the Beatles' catalog), Mute, Ensign and Chrysalis labels, EMI Classics, Virgin Classics, EMI's share of the "Now That's What I call music" compilations, and EMI units in France, Spain, Belgium, Denmark, the Czech Republic, Poland, Portugal, Sweden and Norway. Universal will also sell Sanctuary, Co-Op Music Ltd, King Island Roxystar, MPS Records, its share in Jazzland, and its Greek unit. The total value of the assets to be divested, according to the EU are 30% of EMI's $1.6 billion in revenue, or $480 million.

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"The very significant commitments proposed by Universal will ensure that competition in the music industry is preserved and that European consumers continue to enjoy all its benefits," EU Competition Commissioner Joaquin Almunia said in a statement.

Although the European Commission has long been expected to approve the deal, independent-label and digerati groups indicate that they may still not give up the fight to get the deal blocked.

In the U.S., the Federal Trade Commission has yet to approve the acquisition, although it is widely expected to follow the EU's lead.

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The terms also set behavorial conditions on UMG, which will apparently regulate what it can negotiate into contracts with digital service suppliers.

In Europe, IMPALA, the independent label trade group, issued a statement shortly after the EU approval was announced. "The independents welcome the EC's conclusion that Universal's power is a problem across the whole market, both digital and physical, including access to media," the statement reads in part. "The Commission's insistence on tough remedies, despite strong positioning by Universal, is also applauded, as well as its clear rejection of arguments that piracy and larger online players are restraining forces.

"The remedies package put in place, however, is not considered to be tough enough to curb Universal's improved market position.Independents across the world have objected to the merger since it was first announced. The EC concluded in June that it would be to the detriment of competitors, customers, innovation, consumer choice and ultimately, consumers and cultural diversity."

In a statement, UMG said in part: "Universal Music Group is delighted to have received regulatory clearance from the European Commission for its acquisition of EMI Recorded Music. Today's approval brings to an end an extensive EU regulatory review - the acquisition will benefit the artistic community and music industry. We are delighted UMG will retain over two-thirds of EMI on a global basis, contributing to the accretive nature of the deal."

IMPALA as recently as Monday called on the EU to block the deal; it is not ruling out appealing the approval by going to court, which would refer the case to the European Court of Justice in Luxembourg. "We will consider our options with our lawyers as soon as the full decision is published. In the meantime, it is vital that the divestments process balances the market and maximise competitive forces to the duopoly," IMPALA executive chair Helen Smith said in the organzation's statement.

On Sept. 17, IMPALA sent a letter to the EU asking it to stay true to the findings of its "statement of objections, which predicted that the merger would cause foreclosure of competitor's access to media, as well as price increases and other problems. She said, "It is difficult to see how [Universal' proposed] remedies could be compatible" with those problems.

"If Europe wants to promote competition and diversity, and ensure customers and consumers are protected from copyright abuse, now is the time to take a stance," she wrote to the EU.

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After the EU's approval, it must issue its finding by Sept. 27 and prepare a report on why it approved the deal. That report will remain confidential, while the EU, Universal Music Group and any other parties that supplied proprietary data edit the report so that a non-confidential version of it can be released to the public. That process could take as long as 10 weeks, say those familiar with the process.

If the Federal Trade Commission approves the deal too, next week as expected, UMG has hired Goldman Sachs to take its proposed concessions package of assets quickly to market. In addition to the Warner Music Group, Sony Music Entertainment, Platinum Equity, BMG Rights Management, MacAndrews & Forbes are seen as potential bidders.

The asset sale is expected to be handled by Goldman Sachs Inc. and Bank of America Merrill Lynch, according to the Wall Street Journal.

When the EU gave approval to allow the Sony-led consortium to buy EMI's music-publishing division, it said it would prefer the catalogs in a concessions package to be sold as whole to a new entrant to the music-publishing sector for the publishing side. Earlier on when the Universal Music Group was trying to win approval from the EU by offering independent labels groups in Europe a package of enticements to induce them to green-light the acquisition, it proposed allowing independent to buy certain assets and even including a funding mechanism in the package.

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It remains to be seen whether the EU will try to include a directive that some of the assets should be sold to players in the independent sector, or if it will again say it prefers that the package be sold as a whole to a new entrant to the music industry.

If a new entrant or BMG Rights management wins both auctions, they would scoop up assets with combined annual revenue of about $475 million-$490 million. BMG Rights Management, which itself has annual revenues of about $300 million, would then be well on its way to be becoming a company with annual revenues of $800 million, enough to for it to be potentially regarded as the fourth major.

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However, it would be far behind the Warner Music Group, which has annual revenues of about $2.87 billion; the Sony group including Sony Music Entertainment, Sony/ATV Music Publishing and Sony Music Japan, with revenues of about $6 billion; and the Universal Music Group, which would have revenues of about $6.6 billion (with Sony and Universal's tallies including the projected EMI assets).