Given the timetable for the EU appeal process, Sony BMG—and by extension, WMG-EMI—could remain in limbo until early next year.


Not Only Could the EU Un-ring the Merger Bell, but the Threat of Regulatory Scrutiny Could Once Again Derail WMG-EMI and Widen the Field of Bidders for BMG Songs
BACK TO THE FUTURE: With the fate of the two-year-old merger of Sony and BMG suddenly thrown into doubt by Europe’s second highest court, a number of new questions and uncertainties arise, starting with the timetable for the final decision. Both the EC and Sony BMG can appeal the judgment to the Court of Justice, Europe’s highest ruling body, on points of law. Any appeal must be lodged within two months and 10 days of receipt of the judgment, meaning the review process might not even begin until late September. The review timetable would be one month for Phase I or six weeks if remedies are submitted, followed by four months for Phase II. In other words, Sony BMG—and by extension, WMG-EMI—could remain in limbo until early next year. In the meantime, the EC, having had its clearance decision annulled, must now re-examine the Sony BMG joint venture, and Sony and Bertelsmann are required to formally re-notify the EC of their merger, unless they choose to abandon it... Most experts believe Thursday’s court decision is merely a technicality, and that there is no chance the companies will be forced to split up. The fact that their combined marketshare has dipped from 25% to 20% since 2004 gives strong credence to the argument that a dominating position within the industry has not been established—far from it… Even before the court threw the merger into question, reports out of both Japan and Germany had Sony poised to take a bigger chunk of Sony BMG from Bertelsmann, which would put Sir Howard Stringer’s team firmly in control of the combined companies... Conspiracy theorists are pondering the far-fetched notion that Bertelsmann somehow influenced the court in making its ruling, out of a desire to un-ring the bell and restore the German company to its previous, less troubled state by ridding itself of all of its music holdings, further concluding that the escalating price of both WMG and EMI in the marketplace would substantially enrich the coffers of the debt-despising media giant. Before it can add to its wealth, of course, Bertie still needs to come up with the $6 billion it owes Groupe Bruxelles Lamberg after reacquiring the 25% of the company it had reluctantly ceded to the Belgian investment firm… In terms of short-term implications, it’s possible that the ruling could impact Bertelsmann’s sale of BMG Songs, with strategic bidders UMG, EMI, WMG and Sony all potentially coming under regulatory scrutiny, a situation Bertie would prefer to avoid. In the wake of last week’s EU train wreck, wonderers are wondering whether certain non-competitive players could enter the picture at the last minute. One scenario has Marty Bandier getting out early of his EMI consulting deal early, whereupon he easily raises the necessary funds by putting some of his own millions in the game, buys the publisher and then attempts to buy Warner/Chappell as well following the creation of WEMI. Other rumor mongers bring up the name of former publishing magnate Charles Koppelman, who has a knack for raising big bucks and hasn’t been heard from in some time, leading some to believe he’s due to make a major move. Jeff Kwatinetz reportedly has been eyeing the private equity sector for some time now for a major financial play. Few now recall that Kwatinetz had the ear of Thomas Lee PartnersScott Sperling regarding WMG before Edgar Bronfman Jr. came along with the family checkbook. The Firm honcho recently took a run at TV network PAX and is said to be looking to sell his new music business model to venture capitalists. Also potentially in the picture are Allen & Company’s Larry Mestel and Bono and Les Bider’s Elevation Partners, although the latter were said to be saving their shekels for a move on Warner/ Chappell before its availability was thrown into doubt…

WHITHER WEMI? Since Bronfman and his venture capitalist partners came out on top in their effort to acquire the Warner Music Group in 2003, the industry-wide expectation has been that some combination of WMG and EMI was inevitable, given the modus operandi of the company’s new owners. Thomas Lee Partners and the other equity investors have a wildly successful history of grabbing up properties at bargain-basement prices, inflating their values and then making a killing by selling them off. But last week’s ruling hit those negotiations like a ton of bricks, and one can only speculate what will happen next. The two companies could break off negotiations altogether and either go their own ways or sit tight until the Sony BMG matter is resolved… Most believe the leverage of WMG’s ownership increases relative to that of EMI because Warner Music is just one of numerous properties owned by these cash-rich Wall Street players, who can easily weather any short-term decline in the value of a particular stock. By contrast, EMI has all its eggs in one basket, and its shareholders are desperate to see some improvement of the company’s strategic position… Interestingly, some high rollers still see value in WMG and EMI as separate entities. After plummeting 18%, or nearly $5, on the day of the SBMG court ruling, WMG shares bounced back on Friday, closing at $25.92, up $1.39 on the day. Meanwhile, major EMI investor Hugh Hendry bought more of the British company’s stock as it reached its lowest point Thursday—providing a much-needed vote of confidence for the reeling company… The ruling and subsequent stock slide inspired EMI Chairman Eric Nicoli, who’d been expected to increase EMI’s bid to the $33 range, to reiterate the fairness of the previous $31 offer, even as one analyst stated that WMG shares had just a 20% chance of returning to the $30 level, concluding that $22 was more realistic… The other factor that drove the WMG stock to the $30 plateau before the EU rained on everyone’s parade was the Bunny’s 2.6% gain in marketshare since the end of 2005, solidifying its lead over EMI. But industry watchers believe the up-tick has less to do with the perceived success of Bronfman's digital initiative than it does with a phenomenon as old as the record business—they simply got hot at the right time. The company's current status comes courtesy of James Blunt, who was signed during the Rhone regime; Grand Hustle’s T.I., the only major rap artist to release an album in the first two quarters; and the Red Hot Chili Peppers, who delivered their latest album on schedule… Nicoli’s reassertion of the $31 proposal post-ruling suggests the “Gordon Gecko factor” could come into play. In other words, the possibility now exists that the greediness of WMG’s owners, in pushing for an ever-bigger return on their investment, has led them to over-negotiate to the degree that they’ve now blown any possibility of a sale to EMI, as the British company looks elsewhere for a partner, perhaps an entity not presently in the music business… The final question is the most fundamental one of all: Can the big-time music business continue to exist if the marriage of Sony and BMG is annulled and EMI is prohibited from acquiring WMG, or is its much-ballyhooed digital salvation just another pipe dream floated by a dying industry?