Universal Music – home to Rihanna and U2 – has been told by the European Commission to offer additional concessions if the world’s largest music company is to have a chance of winning regulatory approval for its £1.2bn ($1.9bn) purchase of EMI.
The failure to win over Brussels quickly takes Universal, owned by French company Vivendi and run by Briton Lucian Grainge, closer to the point where it will be forced to hand over £1.2bn to EMI’s owner Citigroup – without necessarily having won the regulatory approval it needs to complete the transaction.
It is understood that the EC rejected Universal’s initial package of proposed divestments, which would have resulted in it offloading Virgin Records, home to the Spice Girls, and other smaller parts of its artist roster and recorded music catalogues to win approval for the purchase.
Earlier this week, Richard Branson, who owned Virgin Records until he sold it to EMI for $1bn in 1992 indicated that he could be interested in taking control of the unit in partnership with one time business colleague, Patrick Zelnick, from Naive Records of France.
Taken together, Universal Music and EMI would account for about 40% of the music sold worldwide, in a market with only two other significant players, Sony Music and Warner Music. With such a large market position in prospect, the takeover has been scrutinised by the EC and the Federal Trade Commission in the United States.
Had the EC been sympathetic to Universal’s initial offer of divestments, the regulator would have informally sounded out third parties in the industry, a process known as “market testing”. But it is understood that the commission this week declined to market test the package that was on offer, prompting Universal to consider more sales of record labels or its catalogue.
Universal had hoped that it would meet an EC deadline of this week to begin the market testing process, which in turn would have given the French owned music group a chance to win regulatory approval for the EMI buyout before Brussels shuts down for the summer. However, the commission may now chose to extend its delibrations into September, creating a further headache for parent company Vivendi.
When Universal agreed to buy EMI from Citigroup in November of last year, owner Vivendi agreed that it would pay Citigroup £1.2bn 10 months later, regardless of whether it had won regulatory approval.
The deadline passes in mid-September and in theory Vivendi will have to hand money over to the US bank, although it is understood that the payment could be delayed for a period if negotiations in Brussels were close to reaching a conclusion. Citigroup ended up owning EMI after it decided to foreclose on its loans to Guy Hands’s Terra Firma, after it concluded that EMI under Hands could not handle its debt load.
The prospect of handing over £1.2bn to Citigroup is particularly embarassing for Vivendi at a time when the French the future direction of the media and technology conglomerate is uncertain following the ousting of group CEO Jean-Bernard Levy. Vivendi has been conducting a strategic review, under chairman Jean Rene Fourtou, which has led to contemplate possible sales of some business units, including its majority shareholding in Activision, the computer games developer, and its Morroccan telephone business.
Negotiations between the EC and Universal are understood to be continuing.