I.B. BAD ON THE RESHUFFLING
OF THE DECK

This time, the smart money was on the wrong pair of horses. The upset winners, Lucian Grainge’s UMG and Marty Bandier’s Sony/ATV, made late charges to overtake Len Blavatnik’s Warner Music—which abruptly ended its pursuit of EMI late in the race, when it appeared to be well in the lead—and Hartwig Masuch’s BMG, which once again lost out on what appeared to be a sure thing. UMG’s late-game comeback immediately and emphatically settles the Sony-UMG marketshare battle, while standing as a major career coup for Grainge, whose stature relative to that of Doug Morris is transformed from promising protégé to formidable challenger… There’s much speculation about why Blavatnik blinked at the 11th hour. Some believe that his due diligence before he took ownership of WMG didn’t give him a good look under the hood, and that after subsequently coming to an understanding of how the business platform models out, he decided he didn’t want another music company that might not have the cash flow necessary to sustain the business. But according to an inside source, there was another reason: the bank from which the Russian billionaire had expected to borrow the money for the deal wouldn’t give it to him unless he was able to persuade Citi to assume all the risk during the regulatory process… Once it became apparent that Blavatnik wasn’t bluffing, as he had earlier this year just before closing the Warner deal, Citi invited Universal back to the table. With no other viable buyer in sight—which UMG knew full well—Citi had no choice but to cave on its demands that the buyer assume the liability for EMI’s $600m pension fund (a major annoyance whose origins date all the way back to the Thorne-EMI era) and for any potential actions emanating from the lawsuit-heavy Terra Firma situation. Universal agreed to assume the regulatory risk, confident that it possessed the expertise to get the deal through, just as it had done in 2006 when it bought BMG Songs—and it reportedly made that point emphatically during the resumed talks. In return, UMG upped its previous bid of $1.2 billion to the $1.9 billion Citi was asking for—and the deal was then quickly consummated… On the publishing side, the combining of Sony/ATV with EMI Music Publishing stands as a sweet moment indeed for Bandier, who is once again in possession of the crowning achievement of his distinguished career, though with a significant caveat: While Sony/ATV is going to administer the EMP’s copyrights, the actual owners of the company will be the consortium of investors who joined forces to buy it. Sony Corp. is just one of these investors, along with David Geffen and several venture capitalists. Bandier’s triumph isn’t simply a matter of being reunited with the pubco he turned into a powerhouse, it also stands as a gratifying payback as he wrests control of EMP from Roger Faxon, with whom Bandier has been extremely competitive since his former lieutenant replaced him as the head of the company in 2002... Aside from Blavatnik, Masuch, BMG N.A. COO Laurent Hubert and Faxon, the big losers are Edgar Bronfman, whose dream of a competitive WEMI has been squashed like a bug, and Lyor Cohen, who would have been a titan had EMI’s recorded-music assets been secured but now oversees a minor player relative to the Big Two. The pressing question now is, can Warner survive as a stand-alone, lacking the economies of scale that had seemed to be an essential element in the company’s quest to become competitive with UMG and Morris’ Sony Music. Interestingly, Morris wound up sitting this one out, not surprising given the fact that parent company Sony Corp. is so heavily leveraged in putting together the coalition to buy EMP, along with the regulatory challenges facing the parent company on the publishing side… As for the $680m worth of non-core UMG assets Vivendi says it’s prepared to sell off, these are believed to consist primarily of overseas holdings and one or two of UMG’s smaller catalogs. But the issue that will probably ultimately determine whether the deal is approved or blocked by the EC and the SEC is the sheer size of a combined Universal-EMI—with a worldwide marketshare of around 36% and a domestic share approaching the presumed tipping point of 40%.... Looking ahead, all that is known for certain is that Vivendi/Universal will initiate the regulatory process during the next few days. As for what will ultimately happen—from Faxon’s fate to the size and nature of the required divestitures and the prospective buyers of these assets—none of that will be known for eight to 10 months, when the regulatory process is expected to be completed. In the meantime, the nagging questions, such as whether Blavatnik will be able to hold on long enough to bid for whatever viable assets become available, or instead will be forced to sell off Warner as a whole or piece by piece, will provide a fascinating subplot to the big picture… As the smoke clears on the events of 11/11/11, this outcome is looking like a far better one than anyone had anticipated for the rank and file at EMI, who have been holding their own while saddled with huge competitive disadvantages. Lacking the manpower and money to play in the big leagues, they nevertheless have pulled off some of the biggest successes of the last few years—Coldplay, Katy Perry, Lady Antebellum, David Guetta and Thirty Seconds to Mars—all of whom have flourished amid ongoing mismanagement and cutbacks. If Warner had won, it would likely have made good on its stated intention to dismantle EMI, which would have meant the end of what was once the most important U.K. music company. But now, there’s talk about retrofitting the grand old dame and bringing her to market with the strength to compete under the growing Universal umbrella. One element that plays into this scheme is that EMI has scaled the company back so far that there’s little or no fat in the key areas, although some muscle has been cut along with the fat. But despite the fact that the severe cutbacks have crippled the company, the above-mentioned artists possess such unique talents that EMI has been able to blow them out on a global basis with far fewer resources and virtually no consistent A&R compared to the other majors… Names in the rumor mill: Irving Azoff, David Lee Roth, Mike Dungan, Greg Thompson, Pascal Nègre, Max Hole, Allen Klein, John Branca, Dave Holmes, Kirkup/Jensen, Alain Levy, Charlie Koppelman and Mario Monti.