Universal Music May Divest Virgin Records, Mute Rights to Clinch EMI Deal (Report)

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LONDON - Vivendi's Universal Music Group could offer to divest Virgin Records and EMI Classics, as well as the distribution rights to independent label Mute to clinch European regulators' approval for its proposed acquisition of EMI's recorded music business, the New York Times reported, citing sources familiar with the situation. UMG executives will meet with members of the European Commission in Brussels this week to discuss concessions to seal the $1.9 billion deal. Sources told THR that most European regulatory reviews will be on hold next month when parts of Europe more or less shut down as people go on holidays. That means the meetings are the company's final push before a decision promised for September.

STORY: Universal Music CEO Open to Asset Sales, Commitments to Seal EMI Deal

To win regulators' green light for the EMI deal, UMG could sell the labels in question outright or divest its European rights to the music of those labels, according to the Times. EU regulators have expressed concern about the music giant's European market power after the proposed acquisition.

UMG's global market share would rise to about 40 percent, but in some markets it would be higher.

I’m extremely open-minded about working with the [European] Commission in the context of behavioral remedies as well as divestitures,” UMG boss Lucian Grainge said last week.

UBS analyst Polo Tang at the time said it is important for the company and parent Vivendi to win deal approval, but it must be careful not to erode the financial benefits of the deal. "One of the key issues here for Vivendi though is to get the deal approved with the smallest possible amount of disposals as the more asset sales they have to do the less benefits they can get out of the merger," he said.

The Times reiterated such concerns, saying that this week's meetings in Brussels could effectively set the value of the deal itself.

When Universal bought EMI from Citigroup last November, the label assumed all regulatory risk in the deal, agreeing to pay more than 80 percent of the price by September, whether the deal was approved by regulators or not. (In the United States, the Federal Trade Commission is investigating the deal.)

The review in Europe has been tougher than expected, with regulators rejecting some of Universal's core arguments, including its assertion that online piracy would keep the enlarged company in check.

For Universal, whose price for EMI was seven times earnings, the value of the deal could drop significantly if it is forced to sell assets at low prices, therefore losing expected efficiencies. According to rough calculations by commentators, a divestment of 10 to 15 percent of EMI's catalogs could cost Universal as much as $400 million. A Universal spokesman declined to comment for this article.

The success of the EMI deal is also critical to Vivendi. Stock in that company is near a nine-year low.