Citigroup-UMG Deal Awaits EU Nod

In order to receive confirmation of the Citigroup-UMG Deal from the European Union (EU), Vivendi’s Universal Music Group (UMG) has come up with the offer of selling global rights to some of EMI Group Ltd.’s, a British music company, most important record labels and catalogues, Reuters reported on Monday. Under the terms of the deal, Citigroup Inc. ( C - Analyst Report ) 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 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, Belgium, the Czech Republic, Poland, Portugal, Sweden and Norway. It also includes Universal brands Sanctuary, Co-Op and Universal's Greek unit.

According to the source, prospective buyers for EMI assets include BMG, the music publishing joint venture between German media group Bertelsmann and Kohlberg Kravis Roberts & Co. ( KKR - Snapshot Report ) , a private-equity firm along with Virgin Records founder Richard Branson and Sony Music.

The EU’s decision is expected to come in the later part of September. A Universal-EMI deal also awaits the U.S. Federal Trade Commission (FTC) approval, though regulators in Canada, Japan and New Zealand have already given their consent to the transaction.

Background

In November 2011, Citigroup divided EMI and sold it for $4.1 billion. EMI’s music and publishing businesses were separated and sold in two parts.

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). UMG still awaits regulatory approvals. 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 - Snapshot Report ) for $2.2 billion.

The group of investors acquiring EMI Music Publishing along with Sony included the Estate of Michael Jackson, Mubadala Development Company PJSC, Jynwel Capital Limited, the Blackstone Group’s ( BX - Analyst Report ) GSO Capital Partners LP and billionaire David Geffen.

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 its artists. 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, CFO 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 all the pros and cons, we believe that this two-part sale deal will maximize the value of EMI for Citigroup while enabling the U.S. Bank to recoup its investments. Moreover, under the current fundamental pressure on the banking sector, such approvals will aid Citigroup to stand out in the market.

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