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By Peter Lauria
November 11, 2011 5:00 PM EST
EMI, the London-based record label that for 80 years brought the world everyone from the Beatles and Queen to Coldplay and Katy Perry, is no longer independent.
The company was chopped up and sold in pieces Friday, with Vivendi's Universal Music Group winning EMI's recorded music auction with a $1.9 billion offer. A consortium led by Japan's Sony is expected to announce later on Friday that it won the auction for EMI's music publishing operations in a deal valued at $2.2 billion, according to numerous sources involved in the process.
Both companies were victorious, coming from behind in the auction's final week after nearly five months of intense negotiations, trumping bids by archrivals Warner Music Group and BMG.
For EMI owner Citigroup Inc, which took control of the record label after its previous owner, Guy Hands' buyout shop Terra Firma, defaulted on loans owed to the investment bank, the better-than-expected $4.1 billion in total deal value approaches the break-even level, something few observers thought possible.
Citigroup provided 2.6 billion pounds ($4.2 billion) of debt to Terra Firma's 2007 leveraged buyout of EMI but had to write off most of the loans as a result of the company's struggles.
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Citigroup declined to comment on the matter.
WARNER WALKS, SONY RISES
Warner Music led the bidding on the recorded music side for much of the auction, while KKR-backed BMG was ahead on the song catalog side. But in a surprise move, Warner Music rescinded its bid last week after failing to agree to terms for taking over EMI's pension liabilities.
Warner's exit opened the door for Universal to return to the negotiating table after previously dropping out of the auction for the very same reason. Under the deal's terms, Universal assumes the regulatory risk -- and getting the deal approved won't be easy -- while Citigroup retains all of EMI's roughly $600 million in pension liabilities and any potential liability from lawsuits related to Terra Firma's ownership.
The $1.9 billion price equates to a cash flow multiple of 7 times, which is roughly in line with the 7.3 times cash flow multiple Len Blavatnik paid in his $3.3 billion deal for Warner Music in July. Cost synergies are expected to lower the cash flow multiple to 5 times, said a source.
On the publishing side, Sony lined up Blackstone Group, Abu Dhabi's Mubadala Development Co, and Raine Group as financing partners. But what really put its offer over the top was a last-minute assist from investment bank UBS, which agreed to provide it with more than $1 billion in financing, according to two sources involved in the deal. Billionaire music and movie mogul David Geffen also invested $50 million in mezzanine debt to help Sony finance the deal, said a third source with knowledge of the situation. Those two late investments allowed Sony to raise its offer and trump BMG.
REGULATORY RISK
Both deals are expected to attract intense regulatory scrutiny, as Universal is already the worldwide market share leader in recorded music and Sony will catapult to the No. 1 position in publishing.
The deal, if approved, would increase Universal's recorded music market share to 36 percent globally. In the U.S., the world's largest music market, the combined company would control 38 percent of the market. More concerning to regulators, however, is the fact that in some European territories Universal's market share would be in excess of 50 percent.
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