EMI Sale to Universal Music, Sony: Analysts Weigh In

EMI Logo - H 2011

EMI Logo - H 2011

Nomura's Matthew Walker says the Universal deal should be "significantly accretive," but cautioned that "many will be difficult to persuade that long-term investment in the music industry is a good idea."

NEW YORK -- The big music labels aren't separate publicly traded companies, but some of its owners are, leading some industry analysts on Friday to weigh in on EMI Group's $4.1 billion deals to sell its recorded music unit to Vivendi's Universal Music Group and its music publishing arm to a group led by Sony Corp.

Observers highlighted added size and clout, as well as cost savings potential as key positives, but some cautioned that the deals must be executed well and won't improve the views of investors who have doubts about the outlook for the music industry.

Mike McGuire, research vp, media at Gartner said the EMI-Vivendi deal "certainly gives Universal a nice little boost to its catalog ... Likewise, Sony publishing is going to be pretty happy with the rights they have acquired."

The deal "would seem to be, so far, a positive for artists with catalogs in the EMI stable," he added.

Warner Music, which lost out to Universal, is seen as affected by the newfound additional size and clout of its competitors, but observers didn't immediately share what they expect the company to do in reaction.

What's going to matter to artists and affect how successful the EMI transactions will be is how well the two new owners can use and monetize artists, songs and albums. For example, for Sony the focus will be on "how well they track/account for the catalogs as they get distributed across multiple networks," McGuire said.

Hudson Square Research analyst Daniel Ernst, who covers Sony Corp., said he expects no real financial effect from the EMI publishing deal.

"Music has been doing very well for Sony, they really turned that business around with BMG inside," he said. "While I expect they will continue to do well with that business, that's not the core future growth [focus], therefore there is zero impact from the EMI deal."

Looking at the Vivendi deal, Nomura Securities analyst Matthew Walker said it could be "significantly accretive" for UMG, potentially adding 5 percent to the bottom line. He estimated $ 250 million in synergies, which could include savings in back office, regional headquarters, A&R and marketing spending. "Costs have already been cut aggressively at Universal in Asia and Europe, and this year the same exercise is being carried out in the U.S.," he said.

In another positive, Walker expects Vivendi management in an investor presentation next week to "call a turn in the music market in the U.S., which is up year-to-date."

But the analyst emphasized that reviews of the deal will come down to where observers see the music industry going. "Many will be difficult to persuade that long-term investment in the music industry is a good idea given continued strong declines in physical product globally, which is offsetting digital increases outside the U.S.," Walker said.

The global music industry is down from $25 billion in 2000 to about $14 billion last year. "Much of this has been owing to the pricing effect of the unbundling of the album rather than piracy, although piracy has had a significant impact," Walker said.

He maintained his "neutral" rating on Vivendi's stock and a price target of 20.80 euros.

Email: Georg.Szalai@thr.com
Twitter: @georgszalai