EU annuls merger of Sony-BMG
EU court rules to overturn OK of Sony-BMG merger
July 14, 2006
BRUSSELS -- In a move that could well hamper further consolidation of the music industry, a European Union court on Thursday annulled the 2004 merger between Sony Music and BMG, prompting the European Commission to say it will re-open the case.
The news put shares of EMI Group and Warner Music Group, which have been engaged in a back-and-forth affair as each has tried to convince the other of the benefits of respective takeover offers, into a freefall. In London, EMI shares closed down 9.2% to £2.78 ($5.12), while WMG shares in New York dropped 17.6% to $24.53.
The European Court of First Instance in Luxembourg ruled that the EC -- the EU's antitrust authority -- failed to show that at the time the then-five music majors were not colluding over market prices.
"The commission did not demonstrate to the requisite legal standard either the nonexistence of a collective dominant position before the concentration or the absence of a risk that such a position would be created as a result of the concentration," Europe's second-highest court said.
The EC can appeal the ruling, but a spokesman said that if the court's decision is upheld, it would have to re-examine the case on the basis of a new merger submission from Sony and BMG.
"We will study the ruling and, if the merger is annulled, then we will relaunch the merger review process," a commission spokesman said. The EC could demand concessions from the two sides, like divestitures of parts of the enterprise, and it could even demand that Sony and BMG dismantle their joint venture.
Nonetheless, the Sony BMG partners remained upbeat Thursday. "Today's judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004," Sony BMG Music Entertainment said.
However, industry analysts agreed that the ruling was a blow to further music merger dreams. "The EC's decision to allow a Sony-BMG deal was widely cited as meaning it would also be amenable to an EMI-WMG merger," Merrill Lynch analyst Jessica Reif Cohen said. "While this decision can be appealed and does not reflect the thinking of the EC per se, it could force the Commission to give greater scrutiny to future deals."
The case was brought by Impala, a trade group for independent record companies, which claimed the five music majors carved up the music market into an effective cartel. Although the EC's initial findings suggested it agreed there was tacit price collusion among the major music companies to raise CD prices and cut consumer choice, it failed to find any evidence strong enough to block the merger.
The EC's investigation concluded that there was no collective dominant position, or effective cartel, on the market for recorded music because of the diversity of the music available and the lack of dispute between the five largest companies.
But the Court discounted this as flawed reasoning. It dismissed, for example, the theory that promotional discounts prevented monopolies from occurring. The Court also slammed the EC's reliance on the absence of retaliatory measures by the majors against errant practices. This was not enough to show there was no effective carve-up of the market, the judges said.
The Court concluded that the arguments were "incomplete," "did not include the relevant data" and, therefore, that the Commission was not capable of supporting the conclusions drawn from them. The Court also criticized the EC for carrying out "an extremely cursory examination" and for presenting "only a few superficial and formal observations."
The decision has implications for the three other music majors: EMI, WMG and Vivendi's Universal Music Group.
Speaking at the EMI annual general meeting later on Thursday, chairman Eric Nicoli said "detailed study" would be required before any wider conclusions about a merger could be made, but he noted that the ruling was about the "particular evidence" presented in the Sony BMG case. Nonetheless, he claimed EMI's "thriving" results still showed "that we have created a strong platform from which to consider the possible acquisition of Warner Music."
A statement for WMG said the company is "in the process of reviewing today's decision ... to determine what impact it might have on a potential combination of Warner Music Group and EMI Group plc."
A combination of EMI and Warner Music would control about 25% of the recorded music market, surpassing Sony BMG in the rankings and moving into second place behind UMG, according to the International Federation of the Phonographic Industry.
Impala said the court ruling could force Sony and BMG to split -- and it would certainly thwart any EMI and Warner merger plans. "There is no doubt that it will block any further mergers and will transform how music and other creative sectors are treated," Impala president and Naive label head Patrick Zelnik said.
Chris Morris in Los Angeles and Georg Szalai in New York contributed to this report.
The news put shares of EMI Group and Warner Music Group, which have been engaged in a back-and-forth affair as each has tried to convince the other of the benefits of respective takeover offers, into a freefall. In London, EMI shares closed down 9.2% to £2.78 ($5.12), while WMG shares in New York dropped 17.6% to $24.53.
The European Court of First Instance in Luxembourg ruled that the EC -- the EU's antitrust authority -- failed to show that at the time the then-five music majors were not colluding over market prices.
"The commission did not demonstrate to the requisite legal standard either the nonexistence of a collective dominant position before the concentration or the absence of a risk that such a position would be created as a result of the concentration," Europe's second-highest court said.
The EC can appeal the ruling, but a spokesman said that if the court's decision is upheld, it would have to re-examine the case on the basis of a new merger submission from Sony and BMG.
"We will study the ruling and, if the merger is annulled, then we will relaunch the merger review process," a commission spokesman said. The EC could demand concessions from the two sides, like divestitures of parts of the enterprise, and it could even demand that Sony and BMG dismantle their joint venture.
Nonetheless, the Sony BMG partners remained upbeat Thursday. "Today's judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004," Sony BMG Music Entertainment said.
However, industry analysts agreed that the ruling was a blow to further music merger dreams. "The EC's decision to allow a Sony-BMG deal was widely cited as meaning it would also be amenable to an EMI-WMG merger," Merrill Lynch analyst Jessica Reif Cohen said. "While this decision can be appealed and does not reflect the thinking of the EC per se, it could force the Commission to give greater scrutiny to future deals."
The case was brought by Impala, a trade group for independent record companies, which claimed the five music majors carved up the music market into an effective cartel. Although the EC's initial findings suggested it agreed there was tacit price collusion among the major music companies to raise CD prices and cut consumer choice, it failed to find any evidence strong enough to block the merger.
The EC's investigation concluded that there was no collective dominant position, or effective cartel, on the market for recorded music because of the diversity of the music available and the lack of dispute between the five largest companies.
But the Court discounted this as flawed reasoning. It dismissed, for example, the theory that promotional discounts prevented monopolies from occurring. The Court also slammed the EC's reliance on the absence of retaliatory measures by the majors against errant practices. This was not enough to show there was no effective carve-up of the market, the judges said.
The Court concluded that the arguments were "incomplete," "did not include the relevant data" and, therefore, that the Commission was not capable of supporting the conclusions drawn from them. The Court also criticized the EC for carrying out "an extremely cursory examination" and for presenting "only a few superficial and formal observations."
The decision has implications for the three other music majors: EMI, WMG and Vivendi's Universal Music Group.
Speaking at the EMI annual general meeting later on Thursday, chairman Eric Nicoli said "detailed study" would be required before any wider conclusions about a merger could be made, but he noted that the ruling was about the "particular evidence" presented in the Sony BMG case. Nonetheless, he claimed EMI's "thriving" results still showed "that we have created a strong platform from which to consider the possible acquisition of Warner Music."
A statement for WMG said the company is "in the process of reviewing today's decision ... to determine what impact it might have on a potential combination of Warner Music Group and EMI Group plc."
A combination of EMI and Warner Music would control about 25% of the recorded music market, surpassing Sony BMG in the rankings and moving into second place behind UMG, according to the International Federation of the Phonographic Industry.
Impala said the court ruling could force Sony and BMG to split -- and it would certainly thwart any EMI and Warner merger plans. "There is no doubt that it will block any further mergers and will transform how music and other creative sectors are treated," Impala president and Naive label head Patrick Zelnik said.
Chris Morris in Los Angeles and Georg Szalai in New York contributed to this report.
Share on LinkedIn
