Warner, EMI Scotch Merger Plans

Warner Music Group (WMG) and EMI have shelved discussion of a potential merger of the two music labels in the wake of a court ruling on an earlier wave of music industry consolidation.

The companies announced they had ceased talks on Thursday, citing a July 13th ruling by the European Court of First Instance. That decision essentially set aside regulators’ earlier approval of a merger agreement between Sony and the Bertelsmann Music Group to create Sony BMG.

The court’s action “has created uncertainty regarding a potential combination,” Warner said in a statement.

No Harmony

“WMG will monitor the situation carefully, but until matters become clearer — for instance as a result of the re-review of Sony BMG by the European Commission or through an appeal to the European Court of Justice — WMG does not believe that it would be prudent to pursue a combination of WMG and EMI,” the company said. “Accordingly, WMG does not intend to make an offer for EMI at this time.”

The two companies have discussed merger possibilities for several years now, with each moving at various stages to acquire the other. The latest proposal known to be on the table involved EMI paying US$31 per share for WMG. The board of Warner Music rejected that deal.

“Against this background, the Board of EMI has decided not to pursue a combination with Warner Music for the time being,” EMI’s statement said. “The Board will review this position in the light of future developments.”

Dead Deal, for Now

The music industry may be ripe for additional consolidation as labels scramble to take advantage of — or at least coexist with — new music distribution technologies and stagnant or declining CD sales.

Though the European court did not say that Sony BMG would have to be dismantled, the ruling appears to give regulators broad latitude to consider how mergers would affect pricing in the music business. The court said the potential impact on hundreds of small independent labels across Europe has not been explored thoroughly enough.

The prospect of a lengthy battle with European regulators — who already have moved to correct what they term “uncompetitive behavior” in several industries — may not have been enough to kill an EMI-WMG merger. However, with continued disagreement over the price of the deal, it was apparently enough to put it on ice for now.

Four proposals have been exchanged since May 1 of this year alone, EMI said, with each company making two bids to buy the other — most believed to be worth around $4.6 billion in a combination of stock and cash.

Driving Forces

EMI and Warner may have walked away from negotiations as much out of frustration over the inability to reach an agreement as from concern that regulators would kill any deal entirely or hold it up by requiring lengthy and costly reviews.

Driving forces in the music industry, meanwhile, indicate that additional merger combinations will be sought, with the puzzle pieces increasingly difficult to fit together as the industry shrinks, said JupiterResearch analyst Mark Mulligan.

“These mergers have never been about market share but about long-term survival,” he explained.

Still, European regulators may have cooled the merger market significantly.

“They made it pretty clear that the entire music spectrum will be up for consideration in reviewing these deals in the future,” remarked Mulligan.