With the first round of bids in for Citigroup's auction of EMI Group, the higher-than-expected levels of the bids suggest that strategic suitors--including the other major-label groups--may have a leg up on other bidders.
Sources say at least 10 suitors placed bids on EMI, with at least four said to have bid on the entire company. Three of those bidders were Access Industries, which purchased Warner Music Group in May; Platinum Equity and the Gores Group, which were finalists in the WMG auction; and private equity firm Permira, which tried to buy EMI in 2006.
Suitors that bid on EMI Music Publishing in the first round, according to sources, were BMG, which is a joint venture between German media giant Bertelsmann and Kohlberg, Kravis & Roberts; Oaktree Capital Management and Primary Wave; and Sony Corp., parent of Sony Music Entertainment.
Those that bid only on EMI's recorded-music operations, according to sources, were MacAndrews & Forbes, the investment arm of billionaire Ron Perelman, and Universal Music Group.
Sources also say Apollo Global Management has placed a bid for EMI, although it's unclear whether that offer was for the entire company or just EMI's music publishing. Earlier this year Apollo paid about $500 million to acquire CKx, which owns entertainment properties, including the rights to the names, images and likenesses of Elvis Presley and Muhammad Ali; the operations of Graceland; and proprietary rights to the "So You Think You Can Dance" and "Pop Idol"/"American Idol" TV show formats.
Bids for EMI Group, sources say, have come in north of $3.5 billion, which exceeds the $3.3 billion that Access Industries paid to acquire WMG, in a deal that closed July 20. EMI Music's control of the Beatles' recording masters and the high regard that investors hold for EMI's publishing catalog have helped generate competitive bidding.
That could pose a problem for would-be suitors if bids continue to escalate in subsequent rounds. But strategic bidders?those with extensive music-related operations?may be able to stay competitive in successive rounds because of anticipated cost savings they could realize from merging their operations with those of EMI.
For example, based on the most recent publicly available fiscal year-end results, a combined WMG/EMI would create a major with about $5.5 billion in annual revenue and $851 million in earnings before interest, taxes, depreciation and amortization, if such a deal could get regulatory approval.
A merger between the two companies could realize as much as $300 million in savings, industry executives say. And those potential savings could, in turn, translate into a higher bid.
While escalating pricing favors strategic bidders, regulatory approval risk weighs heavily against them. One of the reasons why Thomas H. Lee Partners and the other private equity firms decided to accept a lower bid for WMG from Access Industries, instead of the consortium that included Sony, was the risk of antitrust concerns tying up completion of the deal.
However, a strategic buyer could potentially overcome this handicap if it submits a bid that isn't conditional on regulatory approval. When the European Commission said that Universal Music Group had to divest its publishing assets in certain European countries before it could complete its planned acquisition of BMG Music Publishing, Universal absorbed the cost of selling those assets, as well as any potential price risk.
As the EMI auction proceeds to the next round, sources say management presentations will be made to bidders in London the week of Aug. 8 and in New York the following week.