EMI: With Bids Low, Company Considers Whether to Split Up or Postpone Sale
While Citigroup is keeping all five known EMI bidders on the hook, it isn't yet actually conducting a formal third round of bidding with a deadline, sources tell Billboard.biz.
Instead, they have been in touch with all bidders, asking them to either fine-tune their bids or resubmit to address certain informational shortfalls; and they are trying to verify the financing schemes that accompany the bids.
"They are cleaning up the bids," says one Wall Street executive familiar with the EMI auction process.
Most sources familiar with the situation say that it looks like EMI will be sold in pieces, i.e. publishing and recorded music, although at least one bid, from the Warner Music Group, was for the entire company, sources say.
There are a lot of advantages to selling EMI in one piece, including some pretty significant tax advantages for Citigroup, says a Wall Street source. But most sources also say that the bids for the separate pieces of the company, add up to a greater sum than the bid for the entire company.
Meanwhile, purchase agreements are trading hands as Citigroup is herding the bids to include all the information and conditions it wants met, as well as trying to get the bidding to the maximum possible price.
However, potential pension-fund liabilities appear to have undermined EMI pricing, with second-rounds bids falling considerably from the $4 billion price that the auction's first round supposedly brought in.
In fact, the pension-fund liability amounts are dependent on whether EMI is sold wholly or in pieces, says a source. The potential change of ownership control triggered an examination of whether the pension fund was fully funded. This new examination occurred after EMI, the pension fund trustees and the U.K. Pension Regulator hammered out a deal in late 2010 for the company to contribute 197 million pounds in funding, with payments spread out until April 2016. If EMI is sold in its entirety, that plan stays in place, says the source familiar with the situation.
But if the company is sold in pieces, the pension fund liability would be assigned to the recorded music operation, which, while financially healthy, is not as stable as the publishing operation, which has a steadier, more predictable cash flow and a higher percentage of profits to revenue than the record label.
The latest examination of the pension-fund liabilities, which took into consideration that the entity funding those liabilities would be a smaller entity with less revenue, found that the unfunded liabilities could be as much as 400 million pounds ($600 million), according to reports in the Financial Times and the New York Times.
But because of the quandary over the pension-fund liabilities, sources say the bidding levels for the entire company and/or for the recorded music operation fell short of Citigroup's expectations, while the bidding for the publishing operation was more to its liking.
BMG Right Management and Sony Corp. have made bids for EMI Music Publishing, sources say, while the suitors that placed separate bids for the recorded music side of EMI are Universal Music Group, Warner Music Group and Ron Perelman's MacAndrews & Forbes.
While the Warner Music Group also tendered a bid for all of EMI, its unclear whether MacAndrews & Forbes followed up a request for more information on the publishing operating by making a bid for the entire company as well.
With current financial market conditions, which supposedly chased away some of the private equity bidders, Citigroup is scrutinizing the financing included in all the bids, to certify the funding is in place. In recent reports, both the Financial Times and the New York Times suggest that Citigroup may postpone EMI's sale, considering the level of the bids in hand.
The talk of postponement may be a Citigroup play to get bidders to up their offers, says a Wall Street executive familiar with the EMI auction.
The possibility of a postponement is one of the reasons Yamani Global Equities threw its hat into the auction process at the 13th hour, according to sources. The day after bids were due, Oct. 5, Yamani announced that it had tendered a "Hail Mary" bid to acquire EMI in its entirety, even though it didn't have access to the latest EMI financials. All the other bidders, after signing a non-disclosure agreement, got access to a data room where the EMI financials are kept. It is doubtful that Citigroup would let Yamani into the process, unless it plans to postpone the auction.
Yamani CEO Jim Caparro, a former music industry executive who served as chairman of Island Def Jam Music Group and the president of PolyGram Group Distribution, is somewhat familiar with EMI, having served as a consultant to Terra Firma in the 2007 auction for EMI. Yamani would partner with Alliance Warburg Capital Management, which would fund the deal.