EMI, Warner Merger Scrapped

October 5, 2000 -- LONDON (Reuters) — EMI Group Plc and Warner Music on Thursday abandoned their existing plan to create the world's largest music group after tough negotiations with Europe's competition authorities.

But Britain's EMI and Warner Music's U.S. parent Time Warner emphasized their belief that a merger made sense and said they would keep talking in an effort to reach a deal acceptable to regulators.

The two groups scrapped the current plan for a transatlantic joint venture, which would create a $20 billion music behemoth with a strong Internet presence, after they ran out of time to satisfy European anti-trust concerns.

The European Commission said the firms had offered proposals to address its objections, but only after the formal deadline for doing so had passed.

"EMI and Time Warner provided informal proposals that improved substantially the initial remedies," the Commission said in a statement, "but the Commission still had doubts and, in view of the late stage of the procedure, could not properly evaluate the undertakings."

An industry source familiar with the proceedings told Reuters that the events leading to Thursday's decision to withdraw the current proposal actually increased the likelihood they would strike a deal later on.

The commission had been due to hold a meeting of its advisory committee on mergers on Oct. 11, with Oct. 18 the deadline to decide on the proposed tie-up.

The new group, Warner EMI Music, would bring together a star-studded roster of artists and catalogs in a 50-50 joint venture including Madonna, Eric Clapton, and The Beatles.

And with Time Warner's planned $135 billion merger with Internet group AOL, the EMI venture would catapult the U.S. media giant into pole position for music distribution on the Internet. The commission is expected to approve the separate AOL deal and must rule on it by Oct. 24.

Analysts said the abandonment of the EMI-Warner deal could prove a setback for the entire "TMT" (telecoms, media, and technology) industry because EMI and Warner had been seen as a catalyst for its consolidation.

Industry sources have said the EC was concerned the merger would cut the number of major record companies to four from five, giving them dominance over the $40 billion industry. It also feared it would dominate the music-publishing market.

But Time Warner President Richard Parsons said the arrangement would have benefited all parties.

"Because of our confidence in this combination's potential to deliver extraordinary dividends to our artists, employees, shareholders, and music lovers around the world, we will continue to explore ways to structure a combination that will make sense for the two companies and be acceptable to the Commission," Parsons said.

Sources said the two groups were willing to sell off the Virgin music label and Chappell Music, a chunky portion of the Warner Chappell music-publishing business — a move viewed acceptable in certain quarters of the industry.

Several analysts voiced concern about a new deal, saying an overhauled joint venture, complete with disposal plans, could lack the benefits that prompted the deal in the first place.

They fear that proposed disposals would slice off a large part of the $364 million cost savings that both parties had promised when the deal was unveiled in January.

"Regulatory-wise, this is really bad for the media industry as it undermines the whole prospect for TMT consolidation," Nicola Stuart, global head of media research at Commerzbank, said.

She added that selling Virgin Records would deprive the new group of an extensive back catalog of music, including the Rolling Stones, the Spice Girls, and David Bowie.

Industry observers say EMI shareholders may insist that it explore the possibility of a new merger, with someone like Germany's Bertelsmann, if Warner did not work out.

However, observers also question whether shareholders would be willing to go through another regulatory marathon if EMI entered into a new mega-deal.

"The withdrawal of our application allows additional time to reassess regulators' concerns and to pursue solutions simultaneously in Europe and the U.S.," EMI chairman Eric Nicoli said in a statement.

Time Warner is also in the process of finalizing its $135 billion mega-merger with America Online, Inc., which is widely expected to win European approval.