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Warner out, Terra Firma EMI acquisition going ahead?

emi terra firmaIn May, private equity firm Terra Firma put forward a bid to buyout and privatize "Big Four" music label EMI.  That bid was supported by EMI’s board but has been slow to gain shareholder approval amidst anticipation of rival bids from either Warner Music or a partnership assembled by former EMI CEO Jim Fifield.  (As of Tuesday Terra Firma said it had secured only 3.82% of shareholder approval for its $4.88b (GBP2.4b) bid for EMI Group, according to published reports)

The UK Takeover Panel, which oversees and regulates these transactions, set today as the put up, or walkaway, deadline for counteroffers.  It was extended from July 12.

With the deadline looming, and a bidding war not materializing, it’s looking like the deal with Terra Firma will go through after all.

Warner Music has had an interest in a merger since 2000, and they’ve made offers before, but Tuesday they officially stepped away reserving only the right to re-enter bidding should a new buyer come in to bid. 

In the past, European regulators have posed a significant barrier to Warner and EMI merging and the cost of gaining regulatory approval was perceived to be extremely high. (Last summer, the European Union court denied regulatory approval to a proposed merger between the music divisions of Sony and Bertelsmann A.G. and the investigation of that merger still continues. Fears were that a Warner and EMI deal would meet the same fate.)  The Terra Firma offer, meanwhile, is already authorized.

Reportedly, Warner was also troubled by EMI’s financial performance.  With the whole music industry struggling with the market shifting toward digital downloads over CD sales, and with DRM debates ongoing, the company has seen declining revenue.  They posted a net loss of GBP288.5m for the fiscal year to March 31.  Warner too has struggled.

For Warner to acquire EMI, they’d have had to exceed Terra Firma’s offer and the offer would likely have had to be all cash.  Given the state of the industry, concerns about credit, and the uncertainty of regulatory approval – such a $5b or more offer was increasingly unlikely.

Jim Fifield, the former EMI CEO, was trying to assemble a private equity partnership to buy the company himself but he also announced this week he would not make a formal offer.

With Warner and Fifield stepping away, that leaves Terra Firma as the last one standing.  The board of directors at EMI has previously unanimously endorsed the Terra Firma takeover. With nobody else up to bat, that endorsement stands. Down to the wire, but it will likely go through.

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