Updated: Layoffs, New Appointments at Universal-EMI Canada
Updated: Layoffs, New Appointments at Universal-EMI Canada

The extensive, lengthy and ongoing negotiations between the Universal Music Group and the European Union Commission to hammer out a concessions package of assets to be divested means that the regulatory agency is likely to approve the acquisition of EMI recorded music operations, sources speculate.

But one big question remains: What is the cost to UMG? Some contend that since the divestment package keeps growing as the negotiations continue, the acquisition ultimately could come at a cost beyond the $1.9 billion UMG agreed to pay for EMI. While Vivendi says that UMG will realize 100 million euros in savings by rationalizing the back-room functions of both companies, some question whether those savings can be achieved in light of the fact that UMG is obviously going to have to divest much more in assets than it initially thought it would when it made that projection.

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Meanwhile, there continue to be questions about the timetable. While UMG is now one week beyond the informal deadline to complete its concessions package, it is still a half week ahead of the formal Aug. 1 deadline set by the EU.

When the concessions are formally submitted to the EU, the EU will immediately market-test it with dozens of interested parties to see if the divestment is sufficient to appease competitors. While previously it seemed like a sure bet that the majority of UMG's competitors, particularly the Warner Music Group and Sony Music Entertainment, would naysay the concessions package, events over the past couple of weeks have made it not so certain that the independent sector will put up a united front in opposition to the deal.

In a move that would have been brilliant had it succeeded, UMG offered a package of incentives to the IMPALA organization that included putting together a 25-million-euro innovation-and-cultural fund for the trade group and the offer of selling the divested assets, with financing options, to independent companies. That tactic nearly worked, as quotes from the heads of several large indies indicate that a number of those companies in Europe have come out favoring the deal.

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Despite that change of heart, the Impala board on July 17 issued a statement that it voted to continue its opposition to the acquisition. But opposition appears to have carried the day, only because the vote to accept a UMG offer of concessions to independents failed to gain two-thirds of the board's vote, as required by the organization's bylaws. In fact, sources say the board actually voted in favor of accepting UMG's incentive proposals by 14-10.

In a letter to board members, Impala executive chair Helen Smith described the week following that vote as "one of the most trying in Impala's life," as first reported in the New York Times. She further suggested that moves were made from all corners to "manipulate the organization." While she acknowledged that members have different views and that the organization has to respect individual viewpoints, she cautioned that it is a collective responsibility that members don't let others exploit their different views.

Even AIM, the U.K.'s trade association of independent music labels, recognized the temptation that UMG's offer incites. In a letter published in Music Week, AIM chairman and chief executive Alison Wenham wrote: "The offer to Impala from Universal is beguiling, and is clearly intended to make us believe that a company that has controlled the market for 10 years has undergone an epiphany, has seen the light and wants to stimulate the market for others, including smaller companies and digital start-ups."

But she remains skeptical of UMG and asks, "Why such ethical corporate generosity of spirit now?" Wenham said that while some larger indies are keen to buy Universal assets and recover some lost market share, if that occurs and they give their blessing to the EMI acquisition, it will result in short-term gain that will undoubtedly will lead to long-term pain. So "AIM steadfastly remains totally opposed to the merger," she wrote.

Beyond what UMG has already offered to indies, sources say Impala is asking for behavioral remedies too. For example, it wants UMG to refrain from trying to obtain more than its fair share of advances, equity stakes and promotional opportunities beyond its market share from all digital and physical merchants as well as from promotional outlets like TV and radio. Nor do they want UMG to leverage its superstars to gain advantages for new artists, or use most-favored-nation clauses in its agreement with physical retailers.

They also want Universal to allow independent labels to place music on compilations like "Now That's What I Call Music" and receive the same terms as the partners in the "Now" joint venture. Moreover, UMG must agree to license tracks for compilations being prepared by independent labels on the same terms as it gives to the other majors when it licenses music to them for compilations.

Asked about the behavioral remedies that Impala would like to happen, Smith told Billboard.biz, "The EC set out a long list of specific competition issue on Uni/EMI. That list includes market share, control shares, digital, physical, media and a range of other problems where the EC felt competitors would be foreclosed. We have made it clear that unless remedies eliminate all these problems -- specifically, completely and permanently -- the EC will have to block [the deal]. As our board decided last week, all these problems have to be dealt with, which we confirmed in our statement last Tuesday."

Sources say Impala also expects the Warner Music Group to make many of the same concessions, if it turns out to be the main buyer of divested UMG assets and it further wants the organization's approval when the EU looks at its deal. On this point, Smith replied, "On Warner, clearly it would make sense for them to become a strong competitor to Universal. As it would also increase the gap between the majors and the independents, we would of course expect to see a remedies framework along the lines of what we already negotiated on 2007."

As it was, instead of starting the week of July 16 with a strategic coup, UMG's offer to Impala fell short of the goal -- but that wasn't the only plan that went wrong in the following two weeks.

It soon became clear that the EU was asking for more than UMG had prepared to offer as a divestment. While UMG started out by offering to sell Virgin and EMI Classics on the European continent, the package soon grew to a package of divested assets that generated 250 million euros in annual revenues, of which labels with 150 million euros in revenue would be sold while another list of assets that generate about 100 million in revenues were to be licensed to other labels or assigned to other distributors, according to sources. But sources told Billboard.biz Wednesday that the package now has changed so much it has renderedthe above parameters are highly speculative.

Whatever the divestment package now includes, IMPALA -- like the EU -- wants to see UMG below 40% market share in each European territory, but as part of its ask, Impala wants UMG to do it in a way that is measurable and permanent. So for licenses and distribution deals, Impala wants UMG to offer those assets for 15-year terms.

As the negotiations with the EU for the proposed remedy package stretched on and on, UMG's critics began touting more bad news, harping on the fact that the delay could result in the due date for EU's approval being pushed back a few weeks: from Sept. 6 to either Sept. 21 or Sept. 27. If that happens, UMG would be faced with the prospect of paying $1.9 billion on Sept. 10 without knowing if it is gaining approval.

But sources within UMG told Billboard.biz that they weren't concerned -- the payment date was pushed back because Citigroup still had to separate out the pension liabilities, and the paperwork was behind schedule so the payment date will be pushed back to November.

However, a source familiar with the negotiations from the bank side of the deal told Billboard.biz: "It is not true that Citi has extended the payment deadline."

Meanwhile, members of Radiohead's Ed O'Brien, Pink Floyd's Nick Mason and singer Sandie Shaw -- chairs of the Featured Artists Coalition -- and one of UMG's chief critics offered another option that could be a part of the remedies package. Beggars Group founder and chairman Martin Mills wrote in a letter published in the July 25 Financial Times that, although he doesn't think there is a remedies package that could sufficiently contain UMG's dominance, "If there is any adequate compensation and counterbalance for the creation of the controlling entity that would result from this deal, it should be that any artist signed to any Universal or EMI label, currently or historically, should have the opportunity when the companies combine to buy their rights back at discounted market value."

In response, a major label source quipped to Billboard.biz, "Maybe someone should ask Martin if he's willing to sell Adele's masters back to her," an amusing if not exactly even-handed take on the situation.

Overlooked in all the hoopla is the fact that the EU's negotations with UMG over the concessions package is probably the most extensive participation that the Commission ever has had on a deal for a major label. By the end of the process, the EU will likely have a vested interest in the concessions package that will be tested.

Whenever the formal package is finally submitted, competitors will be told what is in the package and will have five days to respond to it. When the compensation package goes around, even though some indies like Impala co-president Patrick Zelnick -- who stunned observers by penning an editorial in favor of the deal, not least because he hopes to buy Virgin assets with Richard Branson -- may favor the package, if the remaining indies and majors make enough noise, it could result in UMG having to make even more concessions.

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But more likely, since it now appears that the EU authored the contents of the concession package as much as UMG did, the deal will be approved, industry sources say.

Then, all eyes will turn to the U.S., where the deal is expected to be approved. But some still wonder if the interest that the Senate took in the deal and the attention it has received in the press will convince the FTC to take a closer-than-expected look.

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As it is, the deal has already passed one important date: According to a presentation on the Vivendi website, since the transaction between Citigroup and EMI includes a locked-box mechanism, UMG will own the cash and the profits or loss from EMI since June 30 -- no matter what date the deal, if its receives regulatory approval, closes.