BMG sale reworked after EU balks at structure

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LONDON -- Vivendi is to restructure the way it will buy BMG Music Publishing after European regulators said they were unhappy with use of a technique that has become increasingly popular in media deals, sources close to the transaction said.

Vivendi's Universal Music had planned to use a structure known to dealmakers as the "hell or high water clause" -- because it guarantees the seller gets paid regardless of whether the buyer gets regulatory approval to do the deal, the sources told Reuters.

Typically in such deals, the seller will agree a price and enlist a middleman, usually a bank, to retain possession of the company changing hands.

"It's an economic deal whereby the risk of owning that asset is effectively in the hands of those trying to buy it," one of the sources said.

But European regulators have told Vivendi the structure for its ?1.63 billion ($2.07 billion) acquisition is unacceptable after usage of it increased, the sources said.

"The EU said: 'We're not going to be enthusiastic about these structures any more, so it behoves you to find another way," another of the sources said.

The sources said there is no danger of the deal falling apart but that Bertelsmann AG, which owned BMG, would now have to hold on to the music publisher pending approval from European competition authorities.

"They still have their definitive agreement that Vivendi will pay Bertelsmann before the end of the year regardless of whether they get the approval or not," one of the sources said.

"So effectively they are custodian of a business that they've already sold, which is a bit of an unusual situation."

Bertelsmann repeated an earlier statement that it was working with Vivendi to complete the deal and expected to be paid by the end of the year. Vivendi declined to comment.

Vivendi originally planned to use the so-called warehouse technique because Bertelsmann insisted that any buyer take all the regulatory risk so that it could be paid quickly as it pulls together financing to buy back a minority stake in the company.

"It's a function of good markets and being able to sell," said one banker, who requested anonymity to avoid rankling clients. "If the buyer really wants (the deal), it's something they're going to have to stomach."

Cable operator Liberty Global is using the structure to buy Czech company Karneval for $416 million, with JPMorgan and Deutsche Bank temporarily holding it.

Denver-based Liberty Global, Europe's largest supplier of cable services, already owns the Czech Republic's top cable provider so there was regulatory risk inherent in buying the country's number two, which was announced in August.

The structure also has been used in other sectors, but is more common in media deals because there are typically extra layers of regulatory clearance needed due to heightened concerns about concentration.

The structure backfired on Lagardere and French bank Natexis when they used it in October 2002 to accommodate Vivendi, which was at the time conducting a fire sale to escape a looming collapse under too much debt.

Natexis agreed to take possession of Vivendi's European publishing activities, pending regulatory approval for Lagardere, to ensure that Vivendi was promptly paid. The deal with Natexis closed within two months.

The European Commission, after a lengthy review, decided that Lagardere would have too much control over the French publishing market by acquiring the whole business, and ordered it to sell more than half the assets. The regulatory review and subsequent sell-offs took about two years to complete.
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