Court cuts in on Edgar's dance
Digital music could help EMI, Warner
With a European court ruling last week that Sony and Bertelsmann had to resubmit their Sony BMG merger plan because a European commission didn't do its job, two other big record companies could be scared off from an acquisition.
EMI and Warner may not want to go through the lengthy regulatory process -- or fight Impala, the indie producers' org that helped influence the Sony ruling -- just as a cold wind seems to be blowing on music mergers in Europe.
Besides being costly, such a battle could also slow down the machinery for acquiring talent and hiring execs.
The ruling is the latest twist in the saga of one of the entertainment world's most dramatic characters. Having reinvented himself in the last two years as a recovery specialist able to wring hits and coin from places that Time Warner couldn't, Edgar Bronfman Jr. began making acquisition noise again.
The protean chief and part-owner of the Warner Music Group wants to beef up his company and reputation -- and maybe stick it to former colleagues at Universal -- by swallowing the larger EMI Group.
Yet for every reason Bronfman might want to build a music empire, there's an argument for why he'd accept EMI's offer to buy WMG. After all, observers point out, it was EMI that approached him.
Reports recently that the company would accept a bid of $5.6 billion -- more than 20% higher than EMI's latest offer -- suggest that if the price is right, Bronfman will take it.
The last few months have brought a furious, and at times comic, set of bids and counterbids, including the odd situation in which each side was bidding roughly the same amount for the other.
The companies officially reached a stalemate several weeks ago. But the wheeling and dealing hasn't stopped; it's just gone proxy. Two weeks ago, a Warner financial advisor reportedly contacted major EMI shareholders floating an offer of $4.8 billion.
And, all the while, leaks and more leaks, spin and more spin, covered two continents. It's a nasty press war, an executive soap opera and a negotiating melodrama all in one.
Never before have two companies appeared so interested in getting together and yet seemed so far apart on the actual details of conjoining.
Even as the July 13 court ruling created a common enemy -- European regulators -- the two sides were unable to resist boasting about their own strengths and the relative advantages of their offers.
Of course, a reasonable person might just say the two should conduct a merger of equals and be done with it. But the calamities of the Sony BMG partnership have ensured reasonable solutions will not play a part.
And last week's ruling seriously gummed up the works.
The two sides say they're evaluating options, but at least one analyst, Bank of America's Michael Savner, believes the talks will be "suspended indefinitely."
Still, the companies have a weapon now that Sony BMG didn't have in 2004: digital music. EMI and Warner could argue that the rise of the format has democratized the industry and made efficiency more necessary for large record companies.
The ruling also has had a cooling effect on the stock of both companies, but, given what looks like an increasingly expensive regulatory battle, that may not dampen the acquisition price. "All of this posturing is going to end with the more conceited of the two companies overpaying for the other," wrote one commentator early last week.
As for Bronfman, after his two-year reinvention, he has to be careful to avoid the bad press that accompanied him after the Vivendi U debacle.
It's a fine line between holding out for a better price and looking like you're trying to milk a stock. Some analysts point out that Warner's meteoric stock rise over the past few months is driven by acquisition buzz, not fundamentals -- an argument bolstered by the fact that the stock dropped significantly after the Sony BMG ruling.
Bronfman has admirably turned around the company, but in trying to extract more capital, could he be squandering some of his own?
