Citi Closes Deal with UMG

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On Friday, Citigroup Inc. (C) completed the sale of EMI Group Ltd.’s recorded music division, EMI Music, to Vivendi’s Universal Music Group (:UMG) for $1.9 billion (£1.2 billion). The deal between Citi and UMG, which was entered in November 2011, received approval from the European Union (EU) in September, after Vivendi’s UMG agreed to sell the global rights of EMI’s most important record labels and catalogues.

Citi's Corporate and Investment Bank acted as advisors to Citi and EMI Group. Moreover, Clifford Chance LLP, Shearman & Sterling LLP and Freshfields Bruckhaus Deringer LLP presided as legal advisors for Citi and EMI.

Background

UMG agreed with the European regulators to sell certain assets like Parlophone, one of EMI's most valued possessions with star acts such as Coldplay and Queen, in order to abide by the antitrust law. The assets-sale is to be completed within six months.

The vending of assets also included the divestment of the Mute, home to Depeche Mode, Ensign and Chrysalis labels, along with EMI Classics, Virgin Classics and EMI units in France, Spain, Denmark, Belgium, the Czech Republic, Poland, Portugal, Sweden and Norway. Additionally, it includes Universal brands Sanctuary, Co-Op Music Ltd, King Island Roxystar, MPS Records, its share in Jazzland and Universal's Greek unit.

Moreover, the Universal-EMI deal got the U.S. Federal Trade Commission‘s (FTC) approval without any conditions. Further, regulators in Canada, Japan and New Zealand have already given their consent to the transaction.

The Other Side of the Coin

In November 2011, Citigroup divided EMI and vended it into two parts. Along with EMI’s sale of recorded music division to UMG, the publishing division was sold to a group of investors led by Sony Corporation of America (:SCA) – a U.S. subsidiary of Sony Corporation (SNE) – for $2.2 billion.

The sale of EMI’s recorded music and publishing assets is an achievement for Citigroup. In 2007, Guy Hands and his private equity team at Terra Firma offered $6.7 billion as the bidding amount for EMI but failed to meet the loan payments provided by Citigroup to finance the deal. Therefore, Citigroup finally took over EMI in February and since then has been conducting auctions to sell this British music company.

In July 2012, the FTC approved the deal between Sony and EMI Music Publishing. The agreement, through which Sony would buy EMI from Citigroup, received the U.S. regulators’ nod without any restrictions.

However, the deal received confirmation from the European Union in April on one condition - it would have to vend the worldwide publishing rights of artists, including Robbie Williams and Lenny Kravitz. To comply with the antitrust law, the association agreed with the European regulators to sell certain assets.

After-Effects of the Deal

Upon closure of the deal, Sony/ATV Music Publishing will manage EMI Music Publishing. Sony/ATV Music Publishing is a joint venture between SNE and the Michael Jackson estate, with 38% holding in the consortium.

EMI Music Publishing, a leading popular music publisher, has a huge collection of musical compositions and a big list of successful songwriters. The business represents and controls varied catalogs of over 1.3 million music copyrights covering all generations, periods and regions of the world. Therefore, Sony/ATV aims to fabricate a strong platform to sustain significant growth and earn revenues from the EMI catalog.

According to Rob Wiesenthal, the Chief Financial Officer of Sony Corporation of America, this deal strengthens the company’s plan to build the operational breadth of Sony/ATV Music Publishing with the proficiency and experience of Marty Bandier, Chairman and CEO of Sony/ATV. Following the acquisition, the growth of digital music services will enable the songwriters’ music to reach a wider audience.

Conclusion

After evaluating the pros and cons, we believe this two-part sale deal will maximize the value of EMI for Citi, while enabling the latter to recoup its investments. Moreover, under the current fundamental pressure on the banking sector, such approvals will aid Citi to stand out in the market.

Currently, Citi retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the stock.

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