European court annuls Sony BMG music venture
Adam Cohen,Mike Esterl,Ethan Smith: Wall Steet Journal
Posted: Fri, 14 Jul 2006 12:00 | © Moneyweb Holdings Limited, 1997-2006
A European court annulled the 2004 merger of Sony Corp. and Bertelsmann AG’s music units, in a surprise ruling creating new uncertainty for record-industry mergers and for the credibility of European regulators who had allowed the deal to go through.
The court’s decision forces the two companies to refile their blueprints for Sony BMG Music Entertainment to the European Commission. The regulators could merely improve their justification for allowing the deal that reduced the industry’s big players from five to four, or require selling off some subsidiary labels, or theoretically break up the two-year-old joint venture. A breakup was widely considered unlikely, but the shadow over the venture could last for months while the commission conducts its review.
The broader impact could be on the shape of the music industry overall. EMI Group PLC and Warner Music Group Corp., the third- and fourth-largest players, have been vying to buy each other. The European Union effectively quashed such efforts with its objections in 2000; following another aborted attempt in 2003, it was again revived after the Sony-BMG merger was approved unconditionally in 2004, creating the industry’s second-largest firm. The court ruling throws a Warner-EMI combination into question again.
“To pile another music-industry merger on top of this would be silly,” said Patrick Wellington, a media analyst with Morgan Stanley. Warner Music’s shares were down 18%, or $5.23, at $24.53 as of 4 p.m. composite trading yesterday on the New York Stock Exchange, following the court’s ruling, and EMI’s shares fell 9.2% to 277.75 pence ($5.09) on the day in London. Sony’s American depositary receipts were off $1.67, or 3.9%, at $41.23, also on the Big Board. In a research note, Numis Securities said, “We believe any further industry consolidation will face prohibitive regulatory challenges.”
Sony-BMG, EMI, Warner and the biggest company, Universal Music Group, a unit of Vivendi, control about 75% of the global market for recorded music.
The big companies played down the consequences of the court ruling. At its annual shareholder meeting in London, EMI continued to express confidence in its ability to acquire Warner. In an email to employees, Rolf Schmidt-Holtz, Sony BMG’s chief executive, wrote that although the new review entails further “cost and inconvenience,” management is “confident” the commission will uphold its original decision. Sony and Bertelsmann both issued statements saying they would review the ruling. “Today’s judgment does not affect the validity of the Sony-BMG joint venture, which has been up and running since August 2004,” Bertelsmann said. In a statement, Warner Music said it was reviewing the decision “to determine what impact it might have” on the putative tie-up.
But representatives of Impala, a trade group for independent music labels that challenged the merger approval, rejoiced at the court’s decision and said the Sony-BMG merger could end up being undone and Warner-EMI prevented. “The existing entity Sony BMG does not have a right to exist as it is anymore,” said Isabelle Wekstein, a legal adviser to the group. “It is illegal.” A commission spokesman wouldn’t rule out a Sony-BMG breakup. “If we were to give a red light, then the joint venture would have to be reversed,” said spokesman Jonathan Todd.
In its ruling, the Court of First Instance in Luxembourg said the commission’s antitrust regulators made “manifest errors” when they allowed the Sony-BMG joint venture in 2004. That decision, made under then-Competition Commissioner Mario Monti, came after the commission had been chastened by the courts for being too aggressive in blocking three mergers, leading regulators to change their decision-making methods. Now the regulators face criticism that they were too weak.
In all four cases, the courts criticized the commission’s methodology. “The key word here is sloppy,” said Johan Ysewyn, an antitrust lawyer at Linklaters law firm in Brussels, saying the commission had overcompensated by trying to go easier on mergers after so many reversals.
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