Vivendi agreed Wednesday to pay $2.09 billion to acquire the BMG Music Publishing Group from media company Bertelsmann in a deal that will give the French company the world’s largest music publishing catalog and songs by artists such as Coldplay and Robbie Williams.
Vivendi SA beat out a group of other bidders that reportedly included Warner Music Group Corp., Viacom Inc. and EMI Group PLC. Its Universal division was thought to have the nod from the beginning, because due to its smaller music publishing arm it was likely to face fewer regulatory constraints than EMI or Warner.
Universal Music Group is already the biggest recorded music company in the world, and the BMG unit is expected to be absorbed by the Universal publishing group.
BMG Music Publishing owns the rights to more than 1 million songs by recording artists such as Nelly, Maroon 5, Christina Aguilera, Justin Timberlake and Mariah Carey, as well as classic hits by the Beach Boys, Barry Manilow and other entertainers.
Universal Chairman and CEO Doug Morris said the acquisition would diversify the company’s portfolio into “key areas” such as classical and Christian music.
'A unique opportunity to grow'
“The acquisition of BMG Music Publishing is a unique opportunity to grow our music publishing business and enhance the value of Universal Music Group at a time when the music market is improving, supported by technological innovations and digital sales,” Vivendi’s chief executive, Jean Bernard Levy, said in a statement.
Some analysts said Vivendi paid too much for the deal and questioned its strategic rationale. Under the former leadership of Jean-Marie Messier, Vivendi embarked on a huge expansion that transformed it from a water utility to a global media conglomerate. But the company was left with a mountain of debt and was forced to sell some assets.
Standard & Poor’s said, however, that it was holding its credit ratings for Vivendi unchanged and noted that music publishing “is a profitable and fairly stable business.”
“The transaction will slightly strengthen Vivendi’s overall business risk profile and support earnings at fully owned media operations,” said Standard & Poor’s credit analyst Patrice Cochelin.
And Fitch saw the acquisition as “credit positive” for Vivendi “by contributing a strong asset at a price that does not significantly increase its leverage.”
“BMG’s music publishing would be a great fit for Vivendi’s Universal Music business, with potential for significant synergies,” said Alex Griffiths of Fitch.
Bertelsmann AG, which also reported an 8.5 percent increase in first-half net profits Wednesday, said the transaction has been approved by the supervisory boards of both companies. It expects to receive the funds before the end of 2006. Vivendi said in a statement the deal had been approved by its management as well.
Deal must be OK'd by regulators
The deal must be approved by U.S. and EU regulators, and analysts warned that they are likely to scrutinize it particularly closely because of the new entity’s size.
In Brussels, the independent record label group IMPALA expressed concern the proposed sale would further damage competition in recorded music, but said it had not yet decided whether to make a formal complaint to EU regulators.
IMPALA’s legal challenge to the Sony-BMG merger led to an EU court ruling that EU regulatory clearance for the deal was illegal, forcing regulators to screen the tie-up again.
BMG Music Publishing’s earnings before interest, taxes and depreciation and amortization totaled 81 million euros ($104 million) on revenue of 371 million euros ($475 million) in 2005.
Music publishers generate revenue by licensing songs for use in movies, TV shows, CDs, video games, ringtones and other media. The companies also collect performance fees when songs are played on the radio or in public venues such as clubs.
During the second quarter of this year, songs held by BMG Music Publishing accounted for 7.3 percent of the airplay on U.S. radio stations, or fifth overall, according to Nielsen Broadcast Data Systems. In the same period, Universal Music Publishing had a 10.2 percent market share, or fourth behind No. 1 EMI Music Publishing’s 19.8 percent share.
Although private equity groups as well as other media companies looked at the unit, Vivendi won because it did not face the same anti-competition issues as its rivals, analysts said. Vivendi shares fell fell 0.41 percent to close at 27.05 euros ($34.61) in Paris trading.
Bertelsmann’s Chief Financial Officer Thomas Rabe said the sale of the publishing unit will help pay back the 4.5 billion euros ($5.76 billion) of debt taken on to finance the repurchase of the 25 percent stake in the company that was held by Groupe Bruxelles Lambert.
“This transaction underscores our continued commitment to the strategy of reducing debt,” Rabe said in a statement. “Bertelsmann remains fully committed to its recorded music business through its partnership with Sony in Sony BMG Music Entertainment.”
New York-based Sony BMG is a joint venture of Sony Corp. and Bertelsmann.
In its first-half financial report, Bertelsmann said earnings rose 8.5 percent to 243 million euros ($311.3 million) on a 15 percent increase in sales to 9.1 billion euros ($11.66 billion).
The privately held, Guetersloh-based company, which owns or controls media companies including RTL Group, Europe’s largest broadcaster, and publisher Random House, said it planned a “restrained” investment approach until the end of 2007.
Bertelsmann and Universal Music Group also said they had settled copyright litigation over the software application Napster, which allowed millions of users around the world to share and swap music files.
The companies said Universal will receive $60 million, which includes reimbursement of legal fees and expenses and covers the resolution of the legal claims of Universal’s recorded music and music publishing businesses, as well as those of BMG Music Publishing.
Bertelsmann, which had invested in Napster, admitted no liability.