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EMI Auction Nearing End Without a Clear Winner

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Bidders believe Citigroup will end the auction for the major label Thursday, but identifying a winner depends on who's doing the talking.

As the bidding for EMI comes into the home stretch, most sources involved in the auction believe the major will be sold in two pieces and that Len Blavatnik's Access Industries -- which acquired Warner Music Group earlier this year -- and the Bertelsmann/Kohlberg Kravis Roberts joint venture BMG Rights Management are in the lead to buy the company's recorded music operation and EMI Music Publishing, respectively.

Moreover, some of the bidders believe that Citigroup, which took control of EMI from Terra Firma in February, will make a decision tomorrow (October 27) and end the auction.

But other insiders aren't so sure that's the case. They suggest instead that the auction process will have produced a lead bidder for each piece of EMI, and that exclusive negotiations to conclude the deals for recording music and publishing will begin. As one source said, "If the auction is over tomorrow then we are out, because we still have a lot of issues left to negotiate" that could take a few more weeks to hammer out.

In the meantime, other sources say that Access Industries -- with financing from UBS AG, Credit Suisse Group, Nomura Holdings and Macquarie Group, according to the Wall Street Journal -- and Ron Perelman's MacAndrews & Forbes are still going toe-to-toe in the auction to buy the recorded-music operation; and all sources term as ballpark a Bloomberg report that said bids are in the $1.5 billion-$1.6 billion range. The Wall Street Journal is reporting that the other bidder for the recorded music operation, Vivendi's Universal Music Group, has dropped out of the auction -- while some sources say that report is accurate, other sources suggest the move may be 11th-hour posturing by UMG.

Over at the other side of the auction, most press reports say that EMI Music Publishing will go for $2 billion, but sources tell Billboard.biz that figure is slightly high and that the bidding is actually in the range of $1.7-$1.9 billion. Other sources suggest that BMG Rights Management has come in with a bid in the $1.7 billion-$1.8 billion range, and the Sony bid is slightly higher. However, the BMG bid is considered more secure because its financing is in place, while Sony is said to be still trying to nail down all the details behind its financing, which the Financial Times has reported is coming from Mubadala Development Co., the Abu Dhabi fund, and investment bank the Raine Group.

EMI bidding in the first round began in the $4 billion range, but that price was waylaid when credit markets got tighter and the stock markets dropped due to concerns about the European economies; and when EMI's pension fund issue turned out that it may be costlier than first thought. Late last year, pension fund the U.K Pension Regulator hammered out an agreement for the major to make 197 million pounds in payments spread out through April 2016. But the sale triggered a re-evaluation of the pension-fund liabilities and by some estimates it could be as much as 400 million pounds, which is currently about $640 million. Moreover, most of the liabilities are being assigned to EMI recorded music operation, sources say.

When EMI was thought to carry a $4 billion price range, sources then said that broke out to about $2.5 billion or even slightly higher for the publishing unit, with $1.5 billion or slightly less for the recorded music operation. Surprisingly, the recorded music operation, which is where the troubling pension fund liabilities are assigned, appears to have appreciated since the beginning of the auction, while publishing pricing appears to have depreciated.

But sources tell Billboard.biz that the $1.5-$1.6 billion price being bandied about for the recorded music operation is "probably the headline price." They suggest that the final negotiations for recorded music will involve how deductions are calculated to account for the pension-fund liabilities.

Regulatory risk is the other area of uncertainty surrounding the final disposition of EMI's assets. The Wall Street Journal reports that Citigroup is insisting that the buyers take on the regulatory risk when a deal is struck. That means that if the buyers and seller agree on all other issues and strike a deal, the sale will happen. And if either the U.S. or European regulatory agencies object to the deal, it will be up to the buyer to deal with the issues. That's what happened when Universal Music Group bought BMG's publishing assets in 2006. When the European Commission regulators objected, Universal had to sell off parts of its publishing assets to accommodate those objections.