What happens now for EMI?

With the dust finally starting to settle after the not guilty verdict presented to Citigroup by a jury at the US District Court for the Southern District of New York, speculation has inevitably turned to what will Terra Firma do with EMI now. The usual suspects have suggested a merger with Warner Music or a breakup of the company. To a large extent, the direction Terra Firma takes to deal with EMI’s massive debt is completely out of the Hands of the senior management of the record company. It’s perhaps worth remembering that the fact that EMI has such a massive debt is not the fault of how well the record company has done, but is more a consequence of the timing of Terra Firma’s takeover and the financial markets collapse. But, despite all the comings and goings, EMI still seems to be operating well and has of late increased revenues, no mean feat when recorded-music sales are continuing to fall.

Rather than add to the rumours, this blog entry will simply reproduce the memo that Roger Faxon, the EMI Group CEO, circulated to EMI staff earlier this week. It pretty much explains how he feels about the company and provides his view on some of the recent speculation. However, it also hints at just how difficult the next year or so will be for the company. Although the ultimate fate of EMI rests on someone else’s shoulders, some of the myths that Faxon has tried to put to rest could still come back to haunt him. But for now, it’s over to you Roger.

“After more than sixteen years of working for EMI, I’ve become well used to the speculation that follows every single move that this company makes. Whether we’re buying, selling, signing or dropping, EMI is never far from the headlines – as you will all have seen this weekend.

But like the sports star whose imminent transfer or trade occupies the back pages of the newspapers for weeks on end, most speculation only contains the smallest grain of truth. So while most people managed to correctly assert that Citigroup won the court case with Terra Firma, the tales of doom and destruction for EMI that followed had as much credibility as the idea that I might be the answer to the Yankees’ pitching problems or Manchester United’s defensive woes.

I know it’s difficult not to be affected by these stories. So, I thought it would be worth me taking a look at some of the myths that have been bandied about over the last few days, and tell you why you should believe them as little as I do:

EMI will go into chapter 11 if it fails its covenants!!
I’m sure that makes good copy, but it’s more fairy tale than actual journalism. For a start, EMI is a British company and there’s no such thing as Chapter 11 in the UK. And as our most recent results make very clear, EMI is easily meeting all its debt obligations, and paying all its bills, with room to spare. That’s more than can be said about most of our competitors, and not the mark of a company that’s in danger of going into any form of bankruptcy.

EMI to sell out to one of its rivals!!!
I don’t know if you’ve looked at any of our competitors recently, but none of them are having a particularly easy time of it. As a result, their corporate structures absolutely are not geared up right now to stomach the financial demands of attempting to take over another big company. And that’s before you even think about the regulatory issues that would almost certainly kick in if any one of the majors bid for one of their rivals. And having been involved [in] the doomed merger of EMI and Warner Music in 2000, I can tell you there is no easy route through those issues.

EMI to sell off catalog assets to stave off financial ruin!!!!
I think this is one of my favorite rumors, because not only is it completely untrue, but it’s utterly idiotic into the bargain. Anyone can make a bit of money by selling off a piece of catalog here and there. But all that does is lower the value of the rest of the business. You might make a quick buck, but you’re left with a company that is suddenly weaker than it was before. And nobody at EMI is interested in that. We’re here to create long-term value – for the artists and writers we represent, for our financial stakeholders, and for each other. And that’s what we’re going to do.

EMI to be broken in two in sell off shock!!!!!
Let me just put this one to bed once and for all. Both Citi and Terra Firma understand that the best way to build value is for EMI to remain as one company. As was clear from the trial documents splitting the company up was looked along the way. But it went away because it simply would not work. Our Global Rights Management strategy, is not only the best way for EMI to create the maximum possible value for our artists and writers, but the best way to achieve the best possible value for the company overall. To be clear, the global rights management strategy for growth can only be pursued if the company is kept together. And so it will be.

So, there’s a few myths firmly laid to rest. If you spot any more crazy headlines, don’t hesitate to send them my way.
As I said to you all on Friday, let’s focus on doing what it takes to be the best we can be. We have a great opportunity ahead of us here to build a thoroughly modern and vibrant company – let’s not let uninformed headlines or press chatter get in the way of us pursuing that goal.”

Music & Copyright is a fortnightly research service published by Informa Telecoms & Media.

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