EMI Deal Sacrificed for Greater Goal


Time Warner Inc. last week scuttled its planned merger with EMI Group, a move that clears the way for European regulatory authorities to approve its pending merger with America Online Inc.

Time Warner's Warner Music division had hoped to create a music-publishing powerhouse through the $20 billion EMI deal. But European regulators were wary of the combined entity's potential dominance of the music market.

Specifically, regulators were concerned that a combined AOL-Time Warner, coupled with the EMI assets, would control online music distribution. But the cancellation of the EMI merger allays that fear.

"What's interesting about this [the EMI deal] is that most of these issues are prospective," said Sanford Bernstein & Co. analyst Tom Wolzien. "It's not like an old-time merger where you put two banks together and you've got 80 percent market share and it's pretty clear you've got an antitrust issue.

"Most of these issues are issues that are looking out: 'What happens if the online stuff is as successful as people say it is? Then there is a problem here.' And yet nobody knows that things are going to be as successful as a lot of people would hope."

Time Warner said in a prepared statement that it was still in negotiations with EMI, European Commission regulators and others concerning a possible combination of the companies.

"We will continue to explore ways to structure a combination that will make sense for the two companies and be acceptable to the commission," Time Warner president Richard Parsons said in the statement. Several analysts believe that by giving up its quest for EMI, Time Warner's pending merger with AOL is more likely to win approval.

"While it's unfortunate that they could not push the [EMI] deal through now, if it clears the way for the AOL-Time Warner deal, it is worth that sacrifice," said Salomon Smith Barney Inc. managing director Jill Krutick in a research report.

Wolzien agreed. "This became triage here," he said.

Investors appeared to feel the same way, driving Time Warner and AOL stock up significantly last Thursday.

Time Warner stock was up $4.56 per share to close at $90.56 each on Oct. 5. AOL was up $3 each to $61.65 per share. Time Warner spokesman Scott Miller would not speculate on European Union approval of the AOL deal.

"Our discussions with the EU are proceeding well and nearing the end," he said. "We are confident that they will conclude successfully."

In the U.S., the Federal Communications Commission and the Federal Trade Commission are both reviewing the $135 billion merger. Both regulators are reportedly pushing for major concessions on open-access to high-speed data services from both companies before they sign off on the merger.

The FCC is expected to wrap up its review later this month. An FTC decision is not expected until sometime in the fall.

Wolzien said it was unlikely that EC approval of the AOL Time Warner deal would affect the FCC's or FTC's decision.

"The issues here [in the U.S.] are more in the open-access arena," Wolzien said. "Over there, the worry was that [Time Warner] would use its U.S. content power to leverage themselves into a dominant position in Europe."

Meanwhile, two U.S. senators last week signaled that they were unhappy with the collapse of the Time Warner-EMI deal in the wake of hostility from the European Commission.

In an Oct. 5 letter to Mario Monti, the EC's commissioner for competition, Sens. Mike DeWine (R-Ohio) and Herb Kohl (D-Wisc.) said the EC's review of Time Warner-EMI and AOL-Time Warner is perhaps being colored "by pan-European protectionism rather than by sound competition policy."

DeWine is chairman of the Senate Subcommittee on Antitrust, Business Rights and Competition; Kohl is the panel's ranking Democrat.

Ted Hearn contributed to this report.