Sunday, Nov. 13, 2011

LOS ANGELES — EMI Group Ltd., the iconic British music company that is home to the Beatles, Coldplay and Katy Perry, is being split and sold for $4.1 billion.

The deals will open EMI's buyers, Universal Music and Sony/ATV, to regulatory scrutiny as they increase their dominance of the music industry.

Universal Music Group said Friday that it will pay £1.2 billion ($1.9 billion) for the recording division, joining Universal artists such as Lady Gaga and Eminem with EMI superstars like David Guetta and Lady Antebellum.

A consortium led by Sony/ATV announced a separate deal Friday to pay $2.2 billion for EMI's publishing division. That business is in charge of songwriting copyrights for such artists as Rihanna and Norah Jones.

Sony/ATV, a joint venture between Sony Corp. and the Michael Jackson estate, is a 38 percent partner in the consortium, according to a person familiar with the situation. Other parties include Mubadala Development Co., Jynwel Capital Ltd., the Blackstone Group and David Geffen.

The two-part sale, if approved by regulators, would further increase Universal Music's dominance in recorded music and springboard Sony/ATV into the top spot as a music publisher, according to Impala, an association of European independent music companies that is against the deal.

The purchases would give Universal Music and Sony/ATV undue negotiating power over artists and distributors of music, even the world's biggest music store, Apple Inc.'s iTunes, Impala said.

Both deals are expected to be carefully reviewed in Europe, the United States, Japan and Australia. Even if regulators give their approval, they could force the sale of key assets or attach other terms.

Helen Smith, Impala's executive chairwoman, noted that when Universal Music bought music publisher BMG in 2007, it had to sell some assets to become smaller. "When you have players that are dominant, even if they take over small players in market share, that can have a serious impact on competition," she said.

Jean-Bernard Levy, CEO of Universal Music's parent company, Vivendi SA, said he was "very confident" the deal would be approved in as little as 10 months.

In the United States, Universal is the top music producer with a 30 percent market share. EMI has an estimated 9 percent share. With a combined share of 39 percent, they would tower over Sony at 29 percent and Warner Music at 19 percent.

On the publishing side, Sony/ATV will add EMI's 1.3 million song copyrights to its roster of 750,000 songs, which include hits from the Beatles, Bob Dylan and Taylor Swift.

The deal leaves Citigroup, EMI's current owner, with liability for its underfunded pension plan, according to two other people familiar with the talks. One put the liability at $600 million, while the other said it was about $260 million.

Citigroup had put EMI up for sale in June, four months after it foreclosed on private equity firm Terra Firma. Terra Firma bought EMI in 2007 in a $6.8 billion acquisition financed with debt from Citigroup, but it couldn't make enough money to keep up with the terms.

Sony/ATV's interest in expanding its library is due to the stability of licensing music copyrights, a business that has been profitable over the years because it relies on business customers such as filmmakers instead of individual consumers.In a move that may appease regulators in Europe and the U.S., Vivendi said it would sell €500 million ($680 million) worth of noncore assets, mostly minority stakes in companies. Strategic bidders that lost out on the auction, such as Warner Music, are expected to vie for those assets.

Vivendi said that London-based EMI would find a safe home at a company headquartered in Paris.

"EMI was the pre-eminent music company that I grew up with," Universal CEO Lucian Grainge said. "UMG is committed to both preserving EMI's cultural heritage and artistic diversity and also investing in its artists and people to grow the company's assets for the future."

Grainge said he would ensure the Beatles' famous recording studio, Abbey Road Studios, would remain open as a "symbol of British culture."

Vivendi believes it is swooping in to buy a troubled asset at an "inflection point" in the music industry, Levy said. Thanks to gains in digital track and album sales, overall U.S. album sales are up 5.2 percent at 360 million units so far this year. At this point last year, overall album sales had plunged 10 percent.

Vivendi expects to cut costs and save more than $150 million a year — making the deal profitable even if the music industry doesn't grow in the future. Vivendi expects the deal to boost its profits in the first year after regulatory approval.

Morningstar analyst Allan Nichols, who covers Vivendi, viewed the deal with trepidation due to fears that the music industry could resume its decline and that regulators could reject it.

But antitrust regulators could be more lenient of big tieups when the music industry is struggling to recover from more than a decade of online piracy, he said.

Also, Vivendi is paying less per dollar of earnings than Access Industries' Len Blavatnik did when he took Warner Music Group Corp. private for $1.24 billion in July.

"The catalog is very impressive, and they didn't pay a whole lot," Nichols said.

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