An EU court overturned the European Commission’s approval of the merger between the music units of Sony and Bertelsmann AG on Thursday, forcing the companies to request clearance for the deal again.
Both Sony and BMG said they would study the ruling and discuss next steps with the commission, but did not believe the decision undermined their business.
“Today’s judgment does not affect the validity of the Sony BMG joint venture, which has been up and running since August 2004,” Bertelsmann said in a statement.
The surprise ruling is the first time the courts have overturned a commission decision to clear a deal and analysts said it could raise the stakes for other such mergers or even lead companies to call off talks. EMI Group PLChas been trading takeover offers with Warner Music Group in recent months.
The Court of First Instance — the EU’s second-highest court — backed a challenge by the independent record label group Impala, which represents 2,500 independent music companies. The court said regulators did not properly show in 2004 that there was not a monopoly position before the deal or that there would not be one afterward.
Either one would be enough to strike down regulatory approval.
The European Commission had unconditionally approved the 50-50 joint venture between Japan’s Sony Music Corp. and BMG, Bertelsmann’s music unit, in July 2004 after finding insufficient evidence the deal would harm consumers.
The court said regulators did not clearly show why they made a late U-turn after alleging in May 2004 that the deal could exacerbate “tacit collusion” in the industry, leading to higher CD prices and less choice for consumers in a market where there is already too little competition.
Even after it cleared the merger, regulators warned that they would watch the industry closely.
The deal, which reduced the number of major music companies from five to four, brought Sony artists like Aerosmith, George Michael and Barbra Streisand and BMG’s Avril Lavigne and Elvis Presley under one roof. Sony and BMG argued they needed to join forces to deal with declining CD sales and the threat from illegal downloading on the Internet.
Regulators had assumed there was no record industry monopoly because there were a variety of products on the market and no open disputes between the five main companies.
But the court found that regulators did not properly support a theory that promotional discounts ultimately prevent a monopoly from occurring.
It also said regulators were wrong to rely on the absence of evidence that record companies had used retaliatory measures in the past. The court said that it found proof of “effective deterrent mechanisms” such as the possibility of hurting an errant record company by excluding it from compilations.
Sony and BMG must now resubmit their applications for antitrust clearance — based on current market conditions — within seven days, said EU spokesman Jonathan Todd.
“We will study the ruling carefully, but it is clear that we will have to re-examine the merger,” he said.
The EU must carry out a new analysis of the deal, looking at current market share, customer base and contracts with artists. It will have to stick to deadlines used before it reformed merger rules in 2004 — meaning regulators will have one month from Sony BMG’s new filing to approve it or open an in-depth probe. However an incomplete filing could slow down the process.
If the EU eventually clears the deal again, there is a legal precedent for it to demand sell-offs or changes to business behavior to overcome antitrust concerns. It is unusual for it to block mergers but such a decision could also see it force Sony and BMG to undo their joint venture.
That’s something that shouldn’t happen after two years, said antitrust lawyer Johan Ysewyn of Linklaters. “The whole process is just too slow. It’s unacceptable. You can’t have a judicial procedure in merger control that takes a year and a half. It needs speed.”
Todd said the Commission had two months to decide if it would appeal the court ruling.
The ruling is likely to raise the stakes for companies to provide an “incredible level of detail” on their business to satisfy regulators’ hunger for information, Ysewyn said.
EMI said “detailed study” would be required before any wider conclusions about a merger could be made, but noted that the ruling was about the “particular evidence” presented in the Sony BMG case. Warner Music Group did not immediately return calls seeking comment.
Patrick Wellington, a media analyst with Morgan Stanley, said that he expected talks to be put on hold. “To pile another music industry merger on top of this would be silly,” he told Dow Jones Newswires.
Warner and EMI scrapped a proposed hookup four years ago on EU antitrust concerns.
Impala said it would fight any mergers between big record labels, saying it believed EU approval for EMI-Warner was unlikely. “This locks the door for an EMI/Warner merger, thankfully, and keeps the doors of market access open for the little guy,” said Hein van der Ree, Impala vice president and managing director of U.S.-Dutch label Epitaph Europe.
A combination of EMI and Warner Music would control about 25 percent of the recorded music market, surpassing Sony BMG in the rankings and moving into second place behind Universal, according to the International Federation of the Phonographic Industry.