EMI, the London-based record label that for 80 years brought the world everyone from the Beatles and Queen to Coldplay and Katy Perry, is no longer independent.
The company was divided and sold in pieces on Friday, with Vivendi’s Universal Music Group winning EMI’s recorded music auction with a US$1.9 billion offer. A consortium led by Japan’s Sony is expected to announce later on Friday that it won the auction for EMI’s music publishing operations in a deal valued at US$2.2 billion, according to sources involved in the process.
Both companies were victorious, coming from behind in the auction’s final week after nearly five months of intense negotiations, trumping bids by archrivals Warner Music Group and BMG.
For EMI owner Citigroup Inc, which took control of the record label after its previous owner, Guy Hands’ buyout shop Terra Firma, defaulted on loans owed to the investment bank, the better--than--expected US$4.1 billion in total-deal value approaches the break-even level, something few observers thought possible. Citigroup provided £2.6 billion (US$4.2 billion) of debt to Terra Firma’s 2007 leveraged buyout of EMI, but had to write off most of the loans as a result of the company’s struggles.
Warner Music led the bidding on the recorded music side for much of the auction, while KKR-backed BMG was ahead on the song catalog side. However, in a surprise move, Warner Music rescinded its bid last week after failing to agree to terms for taking over EMI’s -pension liabilities.
Warner’s exit opened the door for Universal to return to the negotiating table after previously dropping out of the auction for the very same reason. Under the deal’s terms, Universal assumes the regulatory risk — and getting the deal approved won’t be easy — while Citigroup retains all of EMI’s roughly US$600 million in pension liabilities and any potential liability from lawsuits related to Terra Firma’s ownership.
The US$1.9 billion price equates to a cash flow multiple of seven times, which is roughly in line with the 7.3 times cash flow multiple Len Blavatnik paid in his US$3.3 billion deal for Warner Music in July. Cost synergies are expected to lower the cash flow multiple to five times, a source said.
On the publishing side, Sony lined up Blackstone Group, Raine Group and Abu Dhabi’s Mubadala Development Co as financing partners, but what really put its offer over the top was a last-minute assist from investment bank UBS, which agreed to provide it with more than US$1 billion in financing, according to two sources involved in the deal.
Both deals are expected to attract intense regulatory scrutiny, as Universal is already the worldwide market-share leader in recorded music and Sony will catapult to the No. 1 position in publishing.
The deal, if approved, would increase Universal’s recorded music market share to 36 percent globally.
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