Music giants on merger track but Monti may still sing blues

By Peter Chapman

Date: 22/07/04

GLOBAL investors have cast their vote in favour of another big music merger after the European Commission approved the tie-up between recording businesses of Japan's Sony and Germany's Bertelsmann.

Shares in Britain's EMI Music rose by 7% in the 24 hours after Mario Monti, the competition commissioner, confirmed the deal could go ahead - after deciding that a veto would have been hard to defend in the European Court of First Instance (CFI).

The investor confidence showed that markets hope the decision could inspire EMI to attempt to resurrect old plans to merge with US rival Warner - two of the other four remaining 'majors' dominating the €26 billion music market, alongside Vivendi's Universal Music.

The economics of an extra merger are more compelling than ever, said Mark Mulligan, a music industry analyst with Jupiter Research.

"From a business perspective it makes absolute sense.

"The Commission has opposed mergers in the past because they were based on gaining market share. But the focus now is on survival." He said the music giants face a number of challenges driving them to the altar.

"The CD replacement cycle - where people swapped their old vinyl records - is over. Add to that the threat from piracy and the growing threat from DVDs and computer games."

To compete, he says, record companies need to "look at reducing overheads and, for that exact reason, it would make sense for EMI to renegotiate with Warner".

A new deal would bring together EMI Group's star artists, including David Bowie, Janet Jackson and Radiohead with Warner Music Group's Madonna and Cher.

The two majors were forced to ditch an earlier merger plan four years ago when the Commission indicated that it might block the deal.

But, as Monti showed this week, the EU executive is less willing to outlaw deals these days after the Luxembourg-based CFI overruled some of its decisions.

However, the prospects of anti-trust clearance for another music deal are unclear - with some legal experts suggesting that four into three might not go, at least with number crunchers in Monti's competition department (DG Comp).

They were responding to Monti's warning that DG Comp would "keep a close watch on the music sector as it becomes even more concentrated and would very carefully scrutinize any further major concentration in the industry".

Wall Street investment bank Bear Stearns shrugged off this warning, telling clients that they thought EMI and Warner could pull off the deal with "small disposals".

They pointed out that the EMI- Warner partnership would have around 30% market share in Europe and 26% globally. By contrast, Sony-BMG, whose artists include George Michael, Avril Lavigne and Elvis Presley enjoy sales of around 25% of global sales. Universal has 23.5% of the world's total.

But Matthew Hall, a partner with international law firm Ashurst, sounded a more cautious note.

He said the EU executive may argue that a market of just three major record companies would be too concentrated - and that the remaining big firms of similar size would enjoy 'joint dominance'.

This would allow them to make bigger profits by setting high prices, for example for CDs - without any downward competitive pressure from other, less powerful operators.

"They are permitting five to four," added Hall, "but going from four to three would make the market a lot more concentrated. I do not see how this could be a done deal."

Independent music producers, rocked by Monti's decision, are sure to fight any further consolidation.

In the meantime, Brussels-based Impala, a group that represents smaller labels, is considering challenging the Sony-BMG deal in the CFI.

Impala President Michel Lambot said: "We were told that two dinosaurs with head offices in New York are neither endangering the development of a European culture nor the existence of thousands of young and small enterprises.

"This must be a B-movie. I will undoubtedly wake up tomorrow and realize just how bad and foolish my nightmare was."