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What do Katy Perry, the Beatles, and Willie Nelson have in common? They are all currently for sale as Citigroup attempts to unload big-four music giant EMI. Less than six months ago, competitor Warner Music Group sold for over 3 billion dollars, after receiving 20 bids, inspiring hope in the struggling traditional music industry. Ironically, Warner is currently a bidder in the Citigroup auction. However, after a summer of debt ceiling negotiations and troubles in Europe, the markets have not responded as positively to Citigroup’s sale of EMI.
Citigroup acquired EMI from private equity firm Terra Firma Capital Partners in February of 2011 after the firm failed to repay a 5 billion dollar loan, and Citigroup subsequently wrote down over 3 billion dollars in EMI debt. In June, Citigroup put EMI back on the market. EMI still has considerable assets: a publishing division that controls 1.3 million copyrights (20% of the publishing industry) and a slew of top performers (10% of the recording industry). Citigroup initially hoped to gain a similar price to that of Warner. However, due to the uncertainty in financial markets, tight credit, and questions about EMI’s pension fund obligations, Citigroup did not receive as many initial bids for EMI as Warner received earlier this year.
Currently, Citigroup is entertaining only bids for the entire company from MacAndrews & Forbes Holdings, Inc. and Warner. BMG Music, Sony Music Entertainment, and Bertelsmann AG with Kohlberg, Kravis Roberts & Co. all made bids for the publishing arm of EMI. Both Universal Music Group and Warner submitted bids for the records portion of the business. Citigroup is currently reviewing the bids and is projected to make a decision within the week.
In another market or time, a merger, sale, or buyout that restructured a market from four firms down to three would almost definitely raise antitrust allegations (think AT&T and T-Mobile). If Warner, Sony, or BMI were to acquire all or even one arm of EMI, the sale could still grab the attention of antitrust enforcement agents at the FTC or DOJ. Antitrust enforcement is generally concerned with market power and the ability to collude. The most serious concerns would likely be raised by a Universal purchase of the recording portion or a Warner purchase of EMI publishing because of the respective increases in market share. While decreasing the number of large firms in general could possibly give the winners market power and increase the ability to collude, it remains to be seen whether the government will find increased competition in music sales from online music outlets like iTunes and Amazon sufficient to defray antitrust concerns.
What do you think? Should the enforcement agencies attempt to block EMI’s sale to another “big four” music company? Is the competition from online retailers sufficient to ensure a new music powerhouse cannot use market power to raise prices and prevent innovation from the traditional music-label model? Finally, how will the recent ISP agreements affect the traditional companies’ ability to strengthen their positions in the market?
While the sale is not yet final, we should know soon whether Citigroup will accept one of the bids on the table or wait for volatility in the markets to abate and try again in a few months. Regardless of when the sale occurs, be on the lookout for potential antitrust violations in the changing music industry.
– Samara C. Pals
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