Universal To Acquire EMusic

Universal Music Group stepped forward Monday to announce that it had signed a definitive agreement to acquire subscription music service EMusic (Nasdaq: EMUS) in an all-cash deal worth approximately US$23 million.

“We feel that EMusic complements Universal’s other digital and Internet initiatives, and we look forward to joining with them to offer music lovers more and more compelling online destinations and experiences,” said Larry Kenswil, president of Universal Music Group’s eLabs.

Redwood City, California-based EMusic is a potentially valuable acquisition for Universal because the music site has a wealth of experience in the digital download sector.

After EMusic announced last week that it had agreed to be acquired by an unnamed suitor, Webnoize researcher Greg Rohda told the E-Commerce Times that EMusic was a desirable acquisition for one of the major labels because of its 10,000 paying customers, its deals with independent record labels, and its experience in offering legitimate digital downloads.

Although Universal did not say Monday that it planned to integrate EMusic into Duet, the online music service it is developing with Sony, a report in the Thursday edition of the Washington Post said that Universal planned to buy EMusic in order to launch Duet’s subscription-based digital download service.

According to Rohda, the purchase of EMusic makes sense because it gives Duet immediate access to a digital download infrastructure.

Tender Is the Offer

EMusic’s board of directors has unanimously approved the offer. Directors and former and current officers of the company, who together own approximately 17 percent of EMusic’s outstanding shares, have agreed to tender their shares.

Under the terms of the agreement, Los Angeles-based Universal, a division of Vivendi Universal, will start a tender offer on or before April 20th to purchase all outstanding shares of EMusic’s stock for 57 cents per share.

Universal said that its obligation to complete the tender offer was conditional on a minimum tender of shares representing a majority of EMusic’s fully diluted shares, and on EMusic having cash and marketable securities worth a minimum of $5 million on hand on April 30th. If the offer is not completed by July 25th, either party can terminate it.

“We believe that this transaction is in the best interests of our stockholders,” EMusic president and chief executive officer Gene Hoffman said.

Bargain Play

Despite the news last week that EMusic had received a delisting notice from the Nasdaq, Brian Alger, an analyst with Pacific Growth Equities, believes that EMusic is a bargain. He told the E-Commerce Times recently that even though the company was trading below the 57 cents per share offered by Universal, it ended the quarter with $10.9 million in cash on hand.

Additionally, EMusic boasts increasing revenue from its subscription music services. The company said last week that it expects to report revenue of $4.2 million for the quarter ended March 31st.

Preliminary figures indicate that music revenue grew from $1.7 million in the prior quarter to $2.2 million. However, advertising revenue fell during the period from $3 million in the prior quarter to $2 million.

Further sweetening the deal for Universal are EMusic’s long term exclusive deals with numerous independent record companies, which could prove valuable in the “post-Napster” era, according to Alger, as could the EMusic’s Rollingstone.com Web site and its exclusive license to use Rolling Stone cover art and images.