Citigroup Takes Over EMI

EMI

In a move that's being described by business media outlets as a "dramatic" end to a "troubled reign," but could as easily (if more cheekily) be termed a speedbump on the road to oblivion, Citigroup today took control of EMI, one of the four remaining major record labels.

Nearly 80 years old and the last major label based in England, EMI released records by the Beatles, Pink Floyd, Queen, Kate Bush and Kraftwerk, and has in recent years put out music by Katy Perry, Cee Lo and Radiohead, before that band's 2007 split with the label.

EMI's history goes all the way back to the start of recorded sound as a product in the late 19th Century.

"They are a business that made the modern sound recording industry a viable proposition," says historian Peter Martland, author of Since Records Began: EMI: The First 100 Years.

"This is a company with a huge history," Martland says. EMI released major work across pop, rock and classical genres. "In the second half of the 20th century, whether you're talking about Maria Callas, [Herbert] von Karajan, the Beatles and Pink Floyd, that's very unusual."

In 2007, the year Radiohead struck out on its own with the album In Rainbows, EMI was bought by the private equity firm Terra Firma for over 4 billion pounds. According to Ed Christman, the Senior Retail Correspondent for Billboard Magazine, that's when the company's troubles really started.

"Terra Firma paid too much for them," Christman says. And too much of the money it paid was for debt rather than equity. If they had structured the deal differently, it may not have seemed quite so shaky, but as Christman explains, "It was a short-term deal structure and they were stuck with it for the long term."

Though Christman says that EMI was performing well financially, when Terra Firma bought the label in 2007, the company's assets came with $2.5 billion in debt. The firm expected to be able to sell that debt off but the credit crisis arrived soon after. Coupled with the falling fortunes of the music industry as a whole, that kept Terra Firma from finding people willing to buy up that debt. And because the equity firm owed payments to Citigroup that were due in March — payments it had been unable to meet — the bank finally stepped in and took the label away. In exchange for control of the company, Citigroup excused 2.2 billion British pounds of debt that EMI owed.

Bottom line: a large company that puts out recorded music, which was previously owned by another company that existed solely to sell it off at a profit, is now owned by an even more massive company whose only interest is in seeing how quickly — and for how high a price — it can sell that first company.

Or, to use another metaphor that our buddies down the hall at Planet Money might appreciate, think of EMI as a house, and Terra Firma as a homeowner who purchased said house with a sub-prime mortgage that it couldn't pay back, leading the bank (Citigroup, actually a bank) to foreclose on the house/record label. Make sense?

What's the sense in buying EMI now?

Ed Christman says that before the Terra Firma deal, EMI was healthy. And there's still the matter of its archives. "They have probably the largest publishing portfolio in the world," he says.

That publishing portfolio — the copyright to the written versions of songs — could be EMI's most significant asset, because it doesn't depend on sales of albums or even digital tracks. Every time those songs are played on radio or in bars, streamed on the Internet or included in a television or movie soundtrack, the company makes a royalty.

On top of that, Christman adds, "They still have the Beatles catalog."

Martland agrees that EMI's archives of master recordings should continue to be valuable.

"They've got the original product," Martland says. "And people who are interested, whether it's Pink Floyd or the Beatles, want a top-class version, and they'll pay for it."

"The fundamental problem may have been [that they were] the only standalone big music company left in the world," Martland continues. "If you look at all the other surviving major record companies, they are a part of big ventures."

Of the other three major labels, Warner Music Group is owned by a group of private investors led by Edgar Bronfman Jr.; Sony Music Entertainment is owned by Sony Corporation of America; and Universal Music Group is owned by Vivendi SA, a French media conglomerate.

A couple of weeks ago, reports surfaced that a group of bankers within Goldman Sachs had started investigating whether or not the Warner Music Group might be able to purchase EMI, while another group within Goldman Sachs reportedly searches for possible buyers for WMG. BMG has also expressed interest in buying EMI. Citigroup may attempt to sell off the company whole, or it could split the recording and publishing arms between different buyers.

According to an article by Christman at Billboard.biz, Citigroup's takeover was expected later this year after EMI defaulted on its debt, but the decision was pushed forward by the actions of WMG, which could "[threaten] to rob Citigroup of potential bidders if it put up EMI Group for sale after Warner assets were acquired."

All of which means there's a good chance, once the dust has settled, that only three major record labels will remain.

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