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Mon 24 Sep 2012 11:21 AM

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Labels mull legal action over Universal/EMI deal

Lobby group representing independent labels says considering action to block mega-merger

Labels mull legal action over Universal/EMI deal

A lobby group representing independent music companies said it is considering legal action to block the merger of global music giants Universal and EMI, which was granted approval at the weekend by European and US competition authorities.

Universal Music Group, whose parent company Vivendi is part-owned by Qatar, won European and US approval for its US$1.9bn purchase of EMI's recorded music business at the weekend, with the EU requiring the company to sell labels that account for about a third of the British company's revenues.

The US Federal Trade Commission approved the transaction without conditions. With the regulatory approvals, the companies are now free to close the deal.

IMPALA, a lobby group representing independent music companies which has objected to the Universal/EMI merger and an Abu Dhabi-backed deal for Sony to buy EMI’s music publishing arm, welcomed the restrictions put in place by Europe but said they were not harsh enough.

“Following the approval of the Sony/EMI merger, however, this decision nonetheless reinforces what is already a powerful duopoly. Contrary to the basic principles of competition in cultural markets, artists and consumers will ultimately pay the price,” said Helen Smith, executive chair of IMPALA.

“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 maximises competitive forces to the duopoly," she added.

As part of the European restrictions, Universal will sell some of EMI's most prized assets, such as the Parlophone label - home to star acts such as Coldplay and Queen - in a move which some analysts said significantly reduced the deal's attractiveness.

"The whole point of the deal was the back catalogue and getting EMI's artists. But when you look at the bands they had to give away, they are some of their best ones," said Conor O'Shea, analyst at Kepler Capital Markets.

Nonetheless, the deal cements Universal's number one position in the European music industry, with a vast library of current top-selling and legendary names including Jay-Z, Kanye West, Katy Perry, Robbie Williams, Pink Floyd and The Beatles.

Lucian Grainge, chairman and CEO of Universal Music Group, said the company was thrilled to have the deal cleared, while acknowledging the depth of the concessions.

Some analysts said the sale of assets equivalent to around 30 percent of EMI's group revenues, or roughly 10 percent of sales for the combined group, could raise as much as US$750m and help Vivendi reduce its debt.

But a source close to the deal put the value of the assets to be divested at about US$350m. The source did not want to be named to protect a business relationship.

The European Commission, which had raised concerns over the potential market power of the combined group, said the asset sales would have to be completed in six months.

EMI is being sold by Citigroup Inc, which took control of it after its previous owner, Guy Hands' buyout shop Terra Firma, defaulted on loans owed to the investment bank. The bank cleared out the debt, broke the company in two and announced sale of the parts last November.

Universal is buying EMI Recorded Music while Sony snapped up EMI Music Publishing, the portion of the company that handles copyrights to 1.3m songs, for US$2.2bn.

Rivals Warner Music Group and BMG - which is owned by German media group Bertelsmann and private equity group KKR - are expected to have the edge in acquiring the assets because of their financial resources and music expertise.

A source familiar with Warner's thinking said the European Commission told Universal it would have to sell at least two-thirds of the package to a single buyer.

Warner is the world's third-biggest recorded music company, behind global number one Universal and second-place Sony.

The EU watchdog said buyers must be active record firms or those with a proven track record in the music industry, ensuring there would be a strong rival to Universal.

Virgin founder Richard Branson and Sony Music are among those eyeing the assets, sources have told Reuters.

Goldman Sachs and BAML are advising Vivendi on the disposals.

On the block will be the Mute, Ensign and Chrysalis labels, EMI Classics, Virgin Classics, EMI's share of the "NOW! That's what I call music" compilation business, and EMI units in France, Spain, Belgium, Denmark, the Czech Republic, Poland, Portugal, Sweden and Norway.

In addition, Universal will sell its brands Sanctuary, Co-Op Music Ltd, King Island Roxystar, MPS Records, its share in Jazzland, and its Greek unit.

* With agencies