HITS Daily Double
"We have a compelling strategy and plan for our existing businesses, which have excellent prospects, with or without a merger."
——EMI Chairman Eric Nicoli


A (Bigger) Piece In Our Time?
As its Beatles hits collection was making a dramatic #1 bow, the EMI Group was in the news for other reasons as well.

On Tuesday (11/21), EMI admitted that it could take some time to determine whether to press ahead with a proposal to combine its music operations with that of Germany's Bertelsmann (hitsdailydouble.com, 11/21). In any case, sources indicate that the two music giants will forge ahead with a merger deal. Bertie and EMI renewed their merger talks Nov. 10.

In a statement announcing a near-30% decline in pretax profit in the first half of the year, EMI insisted its business was "in good shape," no matter what may happen in the coming months.

"It is likely that our assessment will take some weeks," said EMI Chairman Eric Nicoli in the statement. "We have a compelling strategy and plan for our existing businesses, which have excellent prospects, with or without a merger."

Nicoli said a deal with Bertelsmann would have "similar strategic merits" to its abandoned proposal for a joint venture with Time Warner's Warner Music Group. That proposed deal was withdrawn in October due to opposition from European regulators, who voiced competition concerns as well as a fear of the unknown vis-a-vis the planned America Online-TW pact.

BMG merger talks were made public Tuesday, as EMI posted a fiscal first-half loss because of costs related to its scrapped merger with Time Warner's music unit. EMI lost $44.6 million, or about 6 cents a share, in the six months ended Sept. 30, after taking a $61 million charge for the failed TW merger. Net income for the same period last year was $45.4 million, or about 6 cents a share, EMI said in the statement.

In the U.S., EMI maintained its marketshare of about 10%, which the company deemed "challenging." Still, according to the company, U.S. sales rose 12% to $549.9 million, boosted by the strengthening dollar. EMI increased its European marketshare by 2% percent to just over 18%, helped by sales from artists like Robbie Williams and Radiohead.

While the company cautiously proceeds with merger talks, it is also keeping an eye on the burgeoning online market. According to EMI Recorded Music head Ken Berry, the company expects to sell 20% of its music online, through both e-tail sales of physical product and digital downloads, by 2005. "New media is a growth area," Berry said during a conference call. "Royalties are just starting to rise." Thus far, EMI has invested in 27 companies involved in the digital sale and downloading of music.

Also on Tuesday, in a memo sent to the worldwide staff, Berry said that, "in order to achieve the level of new-repertoire success that we need," he is moving the worldwide head offices of the company from London to New York early next year.

Berry announced EMI's move to New York as a way of "clarifying our commitment to developing our share of the U.S. market" and said he would be bringing "additional executive talent to our company in order to help us address the need to expand our business."

He reiterated that this did not mean a "wholesale move of executives out of London, which will remain a key location for our business... It is important that we make it clear both internally and externally that we are prepared to put the right resources into the U.S. market to address the territory that has traditionally been our Achilles' heel."

Insiders point to EMI's under-performing U.S. operations and Berry's desire to get a strong leader to run its North American operations as two of the company's main concerns.

There has been speculation about Jive/Zomba's Clive Calder (whose label was distributed by EMI before he returned to BMG), having a significant role in a merged EMI-BMG. Others being talked about for top roles in the post-merger world include Capitol CEO Roy Lott, a 20-year BMG veteran, and RCA topper Bob Jamieson, originally brought into BMG by current CEO Rudi Gassner.

Since the proposed merger with WMG fell through after nearly a year of negotiations, EMI has been hoping these merger talks could be put on the fast track. Some have even speculated that Bertelsmann head honcho Thomas Middelhoff did some preliminary legwork to grease the wheels of progress with European Commission head Mario Monti.

Nicoli said that current talks with Bertelsmann had not yet resolved key issues such as management, price or, most importantly, appeasing regulators. Apparently, the British company is also continuing talks regarding an alternative deal with WMG.

"The reason we're taking a rigorous and cautious approach to the Bertelsmann opportunity is that the regulatory landscape has changed dramatically over the last year," said Nicoli. "We need fully to understand the implications of any combination before we put a deal to shareholders."

To state the obvious, stay tuned.