Regulatory Nod for Citi-UMG Deal

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On Friday, the deal between Citigroup Inc. (C) and Universal Music Group (:UMG) received approval from the European Union (EU), after Vivendi’s UMG agreed to sell the global rights of British Music Company, EMI Group Ltd.’s most important record labels and catalogues. Under the terms of the deal, Citi traded EMI’s recorded music division to UMG.

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, 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. It also includes Universal brands Sanctuary, Co-Op Music Ltd, King Island Roxystar, MPS Records, its share in Jazzland and Universal's Greek unit.

This sale of assets would account for about 30% of EMI’s global revenue of $1.6 billion, including $450 million in Europe annually.

Prospective buyers for EMI assets include Warner Music Group, BMG, the music publishing joint venture between German media group, Bertelsmann and Kohlberg Kravis Roberts & Co. (KKR), along with Richard Branson, founder of Virgin Records, and Sony Music.

Moreover, the Universal-EMI deal got the U.S. Federal Trade Commission‘s (FTC) approval without any conditions, owing to the differences between the U.S. and European markets. Further, regulators in Canada, Japan and New Zealand have already given their consent to the transaction. Therefore, now the companies can move ahead with the closure of the deal.

The sale includes one-third of EMI’s assets. Lucian Grainge, chairman and chief executive of UMG, aims at integration, rebuilding of ties with entrepreneurs, creative artists and music professionals with a considerable increase in investment. Moreover, he targets to achieve savings of 100 million pounds ($163 million) by combining the two companies.

However, EU expects Universal to ensure that competition in the music industry is conserved and consumers in Europe continue to enjoy all its benefits. The combined entity-Universal-EMI will have a market share below 40% in Europe after the sale of asset is completed. Additionally, EU had advised UMG to avoid favorable terms for any new digital music deals in Europe for 10 years.

The Goldman Sachs Group, Inc. (GS) and Bank of America Merrill Lynch, a division of Bank of America Corporation (BAC), acted as advisors for Vivendi on the divestments.

Background

In November 2011, Citigroup divided EMI and sold it for $4.1 billion. Citigroup traded EMI’s recorded music division to UMG, the world’s largest record company in terms of market share, for $1.9 billion (£1.2 billion). On the other hand, 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 has 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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