SAN FRANCISCO (CNN/Money) -
When asked what he thought about the proposed merger between Warner Music (a division of AOL Time Warner, parent company of CNN/Money) and Britain-based EMI Music, AOL Time Warner honcho Richard Parsons could hardly contain himself.
"This is a match made in heaven," he said. "It's going to create value not only for EMI shareholders but also for Time Warner (AOL: Research, Estimates) shareholders and, we would argue, for artists who will be a part of our company going forward and for the employees."
Of course, he said that in January 2000, when AOL was merging with Time Warner and the deal in question involved Warner Music purchasing EMI. If recent unconfirmed reports are to be believed, the tables are now turned: EMI is interested in purchasing Warner Music.
The first proposed takeover died two and a half years ago in Europe, where regulators raised concerns about the effects of an AOL/EMI juggernaut, leading AOL brass to scuttle the deal so the Time Warner merger could push through.
On Monday the Wall Street Journal reported that EMI was in "preliminary talks" to acquire the AOL music division. Spokespersons for the companies wouldn't comment, but the report isn't surprising -- and a deal would make sense. Here's why.
First, AOL Time Warner needs to shed some of its debt load this year. CEO Parsons has already predicted that the music division's 2003 profits won't even be as strong as last year's anemic showing, when revenues climbed only 2 percent over 2001's and ebitda gained 10 percent. Overall CD shipments are dropping and will continue to do so until the industry 1) discovers new hit-makers, or 2) figures out online distribution.
So it's hardly a shock that AOL Time Warner would want to unload its music division. "Music is in transition," says Phil Leigh, an analyst with Raymond James & Associates. "AOL doesn't want to focus on a business in transition."
On the other hand, of the five major record labels, EMI is the only one that isn't part of a large media conglomerate (the others are Bertelsmann's BMG, Sony (SNE: Research, Estimates) Music, Vivendi's (V: Research, Estimates) Universal Music, and Warner Music). The only business it has is the one "in transition." As such, it might as well make a play for more market share.
EMI is the smallest of the major labels, and purchasing Warner Music would give it about 22 percent of the market -- second only to Universal's 30 percent market share. Perhaps more important, EMI's catalog would expand significantly -- no small matter for a label that led the industry in making its catalog available through online music sites.
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"This is a catalog play," says Gartner Analyst P.J. McNealy. And with stock prices down, EMI could scoop up Warner at a fire-sale price.
To buy Warner Music outright, however, EMI will need to find some cash -- and lots of it. EMI's current market cap of about $1.4 billion makes even a price tag of $3 to $4 billion untenable, introducing the possibility of AOL selling a majority stake as opposed to the entire unit.
But some believe that with prices under pressure, getting money for the deal won't be a problem. "I don't think EMI would start negotiating if it didn't think it could get financing for the deal," says Susan Kevorkian, an IDC analyst.
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