Will Sony Dominate the Music Industry?
The European Commission will issue a ruling on Thursday in one of the music industry’s biggest deals regarding Sony’s (NYSE:SNE) proposed $2.2 billion takeover of EMI Music Publishing.
Sony has been private about the deal, except to reassure the public that the combined company will not dominate the lucrative publishing industry. However, a confidential report says the company is expected to lay off approximately 60 percent of EMI’s publishing staff within two years. The mass lay off is part of $70 million in annual savings.
The report also reveals Sony’s estimate of its resulting market share. It is no secret that publishers loath to publicly state this figure because of the various revealing methods of computation.
According to Sony’s estimate for investors, the total publishing assets of Sony and EMI would account for 31 percent of the business. This would make Sony a leader in the industry. The commission could approve Sony’s bid or move to a second phase of its investigation on Thursday.
The deal with Sony is just one of two reached by Citigroup (NYSE:C) last year to divide EMI between Sony and the Universal Music Group. Universal bid $1.9 billion for the record labels. The commission has currently moved to the second phase of its investigation in Universal’s bid.
Both the U.S. Federal Communications Commission and the European Commission are paying close attention to the companies’ growth, and are trying to gauge how much leverage they would gain over competitors and digital music services that rely on licenses from labels and publishers. Regulators on both continents may demand divestments from both companies, as were required when Europe approved Universal’s $2.1 billion takeover of BMG Music Publishing in 2007.
Independent labels, consumer advocates, and Impala, a European organization representing small music companies, have shown concern over the deals, which they contend would give Sony and Universal a monopoly in the markets for publishing and recording, collecting societies, how artists are signed, and how artists’ careers develop.
Sony would not comment on the deal or the confidential report document, a 74-page prospectus for a $1.1 billion bond offering that was prepared in January on Sony’s behalf by UBS (NYSE:UBS). The prospectus states that the combined publishing assets of EMI and Sony will represent the world’s largest publishing catalog.
Sony’s bid for EMI is complex because the company already has a publishing division Sony/ATV, which is a joint venture with the estate of Michael Jackson. The agreement with the estate stipulates that EMI must be maintained as a separate company. Sony/ATV controls 750,000 songs, while EMI is the most highly regarded company in publishing with over 1.3 million songs.
Under the deal, Sony/ATV will administer EMI’s business, such as processing royalties and making licensing deals. Sony/ATV will receive 15 percent of net publisher’s shares as an administration fee in exchange for eliminating around $120 million in overhead expenses. This is expected to save EMI’s operations $70 million and net Sony/ATV $50 million.
Savings are expected to appear in the form of layoffs, with 152 people to be laid off in the first year, and 174 to be used on a temporary, transitional basis. Doing away with 326 positions totals to approximately 63 percent of EMI publishing’s current work force of 515.
According to the deal, Sony and the Jackson estate would have a 38 percent stake in EMI. The remainder will be owed by four investors, including the sovereign wealth fund Mubadala of Abu Dhabi, Jynwel Capital of Malaysia, Blackstone’s (NYSE:BX) GSO Capital Partners, and Hollywood mogul David Geffen.