The Universal Music Group will take some extra time to prepare and submit its remedies package to the EU Commission, as part of its gambit to win regulatory approval to acquire EMI's recorded-music division. Depending on who you listen to, the package is due at midnight either on Tuesday or Wednesday but in any event, sources say that the Universal Music Group will submit its divestment proposals to the EU on Thursday.
When the week began, sources say the Universal Music Group was working on a remedies package that would propose selling Virgin Records and EMI Classics catalog on the continent of Europe. Initially, UMG was trying to exclude Virgin U.K. from that package, which along with the U.S. Virgin operation is the main source of repertoire for the label.
The remedies package that UMG intended to submit on Monday, but has now been shifted to Thursday, suggests that negotiations with the EU resulted in the regulatory agency asking for more than UMG initially was offering.
Sources say that the EU wants UMG to divest the Virgin and EMI Classics assets on a global basis, but UMG has instead offered to add the Virgin U.K. catalog, which includes Genesis and the Sex Pistols, as part of its remedies, according to a source, but not Virgin's U.S. catalog which includes Lenny Kravitz, Janet Jackson and Paula Abdul titles.
If the EU is willing to accept such a proposal, it likely also is pushing UMG to include current acts as well in the remedies package of assets to be divested, other sources point out. In fact, that's what Sony-led consortium had to do-add in current hit songwriters to its remedies package--in order to gain regulatory approval of EMI Music Publishing, It did and it won approval from the EU and subsequently won approval in the U.S. from the Federal Trade Commission,clearing the way for the deal to close on June 29.
Universal-EMI Merger: European Commision's Statement of Objections Leak (Report)
But one group of Wall Street analysts following Vivendi expects that Universal will have to sell more than what UMG is said to be currently proposing. On July 17, the Barclays European Media team issued a report that tried to compensate for UMG's regulatory risk by assuming UMG would have to sell 50% of EMI in order to win approval. The Barclays team further assumed that UMG would only get five time earnings before interest, taxes, depreciation and amortization in that asset disposal, instead of the seven-times EBITDA multiple it paid, which would result in a loss of 200 million euros.
Meanwhile, although the UMG remedies package may be a day or two late in being submitted, the EU will likely begin market testing the UMG proposed asset divestment immediately, sources indicate. That could take up to a week, which would still give the EU plenty of time to make its decision of whether to approve the sale or block it and write it up in advance of the Sept. 6, the current deadline for the EU to make its decision on the deal, according to a source.
Some sources insist that the late UMG submission will automatically trigger a 15-day extension to be added onto the Sept. 6 deadline that the EU had to approve or block the deal, while others say whether the 15-day extension is added on is at the discretion of the EU. Still others suggest it would trigger a 21-day extension.
If the 15 or-21-day extension is added on, it will put UMG at risk of having to fork over $1.9 billion to pay Citigroup for EMI on the payment due date of September 15, without knowing whether it won approval of the deal from the EU. But regardless of when they pay, if UMG doesn't win regulatory approval, then this deal is a disaster well beyond UMG having to pay without knowing the decision.
In another issue that sources disagree on: If UMG doesn't win regulatory approval, which company would wind-up selling EMI? A source within the UMG camp insists UMG would wind up having to perform the sale duties, while sources at other majors insist that current owner Citigroup would be the seller. For its part, Citigroup refused to comment.
Things may be going smoother for UMG in the U.S. Some sources point out the fact that UMG is trying to keep ownership in the Virgin Records and EMI Classics in the U.S. indicates that it thinks it is faring better with the FTC.
In other related matters, after Impala co-president Patrick Zelnik, who heads up Naïve Records in France, wrote an op-ed in the Financial Times endorsing the merger, it triggered an outcry from indie groups in Europe as both the IMPALA board and the Merlin board separately voted to continue their opposition to the Universal/EMI merger.
UMG also got an endorsement of the deal late Monday in an un-bylined editorial from the Financial Times.
As it turns out, Zelnik's endorsement of the Universal acquisition of EMI could work out to his benefit, should the deal be approved contingent on the sale of Virgin Records assets. Zelnick and Richard Branson, who founded Virgin and sold the record label to EMI for almost $1 billion back in1992, have had discussions about partnering to buy whatever Virgin assets are up for sale.
Branson's spokesman Nick Fox supplied this statement to Billboard. "Richard Branson and Virgin have been assessing how to get back into recorded music business for many years. The potential disposal of Virgin Records by Universal Music offers a wonderful opportunity to recreate a dynamic independent label in the market."
Branson's last effort to get back into music, starting the V2 label, was not successful, and eventually the label was sold separately in two pieces, with those assets currently owned by E1 Entertainment and UMG.
In any event, the Warner Music Group, BMG Rights Management and others from the music industry and private equity would be likely suitors for whatever EMI assets come up for sale.