Private Equity May Give EMI a Spin

The music company's shares surged Tuesday on news of a potential takeover bid

by Kate Norton

EMI has got a new suitor -- and long-suffering shareholders of the world's third-largest music company are overjoyed. Shares soared more than 11% in U.K. trading on Nov. 28 after the London-based business said it received a preliminary approach which "may or may not" lead to a takeover offer.

The announcement followed a report in the Financial Times, citing people familiar with the situation, that EMI (EMIPY) is in talks with private equity firms including Kohlberg Kravis Roberts & Co. and Goldman Sachs (GS), about a possible £2.5 billion ($4.87 billion) bid.

EMI and Warner Music Group (WMG) tried to buy each other last summer in an effort to create the world's second-largest music company and cut costs. The two called off talks after failing to resolve control issues (see BusinessWeek.com, 6/28/06, "WMG and EMI: Who Plays Lead?"). They also were concerned that EU antitrust officials could reject a merger after a European court reversed approval of Sony's (SNE) 2004 tie-up with Bertlesmann's BMG arm.

"Post-Warner, the prospects for EMI as a stand-alone company are not great," says Alex Degroote, media analyst at Panmure Gordon in London. "The company has a pretty checkered history." EMI posted a first-half loss of £30.1 million ($58.6 million) compared to a profit a year earlier, and the company has been dogged by a series of profit warnings in recent years.

Shares of EMI, which boasts the Rolling Stones, Coldplay, and Robbie Williams among its roster of artists, also rose in New York on the news of the potential buyout. KKR declined comment; no one at Goldman Sachs was immediately available.

KKR and EMI worked together last summer to bid for BMG's Music publishing assets, though they were beaten out by Vivendi's Universal arm.

Private equity firms have been hungrily eyeing media companies as the Internet shakes up traditional business models and weakens media valuations (see BusinessWeek.com, 5/17/06, "Private Equity's Media Targets"). Earlier this year, Carl Icahn tried unsuccessfully to take control of Time Warner (TWX), while Vivendi said on Nov. 4 that a "friendly" takeover approach from KKR did not result in an offer.

But it's tough to see the merit in a music-only company like EMI, which gets the bulk of its revenues from recorded music, a notoriously volatile arena where piracy is rife, analysts said. A buyout company also won't be able to benefit from the cost-cutting synergies that would have been possible with a merger of EMI and Warner, Degroote says.

The most likely route to value creation would be to sell off the EMI Music arm, where underlying profit from operations fell to £11.5 million from £38.3 million in the first six months. That would enable the buyout firms to build on the strength of the more lucrative music publishing arm, currently is the industry's largest. Operating profit at the division rose 5.8% in the first half to £51.2 million.

Norton is a BusinessWeek.com correspondent in London.