GAME OVER FOR WEMI—FOR NOW

Confirming recent speculation (hitsdailydouble, 10/4), Warner Music Group and EMI withdrew their plans for $20 billion joint venture today after it became clear the European Commission would likely veto the deal.

Commission officials had drafted a decision to veto the deal despite WMG-EMI offers to sell off Virgin Records and Chappell Music Publishing.

EMI and Time Warner have been in negotiations with the commission, discussing a range of possible concessions aimed at responding to the EC's concerns while trying to preserve the economic merits of their proposed joint venture, according to the EMI Group release announcing the decision. As of today, the two have terminated their current agreement, but have agreed to continue discussions with each other, the commission, other regulators and, of course, anyone who'll listen, to achieve a "combination which is acceptable to all parties." The statement goes on to say any new agreement will obviously be subject to EMI Group shareholder approval.

News the plan—which promised cost savings of 250 million pounds ($363 million)—had been abandoned pushed EMI shares 5.6 percent lower to close at 528 pence. Time Warner's shares gained nearly five percent in New York to $90.28.

With WEMI no longer a factor, the commission is expected to green-light the proposed AOL-Time Warner merger. The WMG-EMI deal was considered a major stumbling block on the road to AOLTW approval. Officials had been worried that the new combination would dominate the online market for music distribution and effectively reduce the number of major labels to four.

Time Warner President Richard Parsons said the companies would "continue to explore ways to structure a combination that will make sense for the two companies and be acceptable to the commission."

EMI Chairman Eric Nicoli said his company would continue to look for a solution to antitrust concerns, but warned that this would not be at the expense of shareholder interest.

"The withdrawal of our application allows additional time to reassess regulators' concerns and to pursue solutions simultaneously in Europe and the U.S. We have been, and will continue to be, flexible in responding to the European Commission's concerns. However, any concessions that are ultimately made must be consistent with our shareholder value objectives. Now, do you think Mr. Monti would prefer a poppy-seed biscuit or a crumpet?"

Time Warner President Richard Parsons, said: "Our proposed joint venture with EMI would bring together two of the most creative, and complementary, organizations in the world-wide music industry. Because of our confidence in this combination's potential to deliver extraordinary dividends to our artists, employees, shareholders and music lovers around the world, we will continue to explore ways to structure a combination that will make sense for the two companies and be acceptable to the Commission."

In an internal memo circulated to all EMI Recorded Music employees, Ken Berry said the length of time that the EC took to investigate competitive issues in music and music publishing plus the vertical integration arising from the Internet cut into the companies'ability to address those concerns.

"It became clear that holding to the truncated timetable could result in the deal being approved, but on terms that were not attractive for EMI or TW, so, after consultation with the EC, it was decided the best plan was to withdraw our merger from consideration to give us a chance to review alternative structures that would meet the concerns ultimately identified by the commission."

In an internal memo to his troops, WMG chief Roger Ames said: "We have pulled back from the deal because it is in the best interests of the Warner Music Group. We are going to keep talking. This gives us a chance to review our alternative proposals to meet the concerns of the EU."

The EC's statement said: "EMI and Time Warner provided informal proposals that improved substantially the initial remedies, but the commission still had doubts and, in view of the late stage of the procedure, could not properly evaluate the undertakings.''

While WMG and EMI could draft a new pact and resubmit it for commission approval, this tactic hasn't necessarily worked for other companies, but inside observers say withdrawing the proposal might just increase the chances of EC approval. Still, EU Competition Commissioner Mario Monti has blocked three mergers in the past year. Another two were withdrawn when it became clear they would be vetoed. Looks like he can make that an even 3-3 record now.