Record Deal For Time Warner

British music company EMI Group and America's Time Warner Inc. announced Monday they would merge their music businesses, with combined revenues of $8 billion a year, to become the world's second-largest business in the field.

Only last year's Seagram's-Polygram deal is bigger, points out CBS News Correspondent Kimberly Dozier...and, thanks to Time Warner's linkup with America Online announced last week, could dominate music distribution on the Internet.

"Frankly, in two or three years' time, it will be just like ordering a takeaway pizza," said Justin Urquart Stuart of Barclay's Stockbrokers.

The new company, to be called Warner EMI Music, would have combined a pretax profit of $1 billion. Time Warner and EMI would each control half of the new company, second in size only to Seagram's Universal Music.

The new firm would represent 2,500 musicians. EMI brings to the deal the Virgin, Priority and Capitol record labels - including names like the Spice Girls, Van Morrison and Frank Sinatra. Time Warner contributes its Atlantic, Elektra and Warner Brothers labels that include Cher, Eric Clapton, Phil Collins, Madonna, Metallica and REM.

"You've got Capitol in there - the Beatles and the Beach Boys - and though Capitol hasn't been a really hot label lately, they've got one of the most impressive catalogues," said New York Times music critic Neil Strauss.

But the combined company might not be that much of a powerhouse on the current music scene, he said.

"They've both fallen on hard times because with the pop music, the teen-bopper thing, BMG has a lock on that with the Backstreet Boys, Britney Spears, 'N Sync," Strauss said. "Columbia has Latin pop. So the Warner and EMI labels were really getting cut out of it."

Now, Strauss said some music industry workers may be cut out of it, as well as some performers.

"When AOL/Time Warner takes over, there's going to be a lot of bloodshed as far as jobs," he warned. "Bands that aren't selling huge amounts or the bands that were signed when alternative rock was big are going to find themselves without a record label."

The enlarged group would benefit from annual cost savings of $400 million by the end of the third year, the companies said in a joint statement.

The merged group, which would employ 23,000 people worldwide, would cut 3,000 jobs over the next three years, said Ken Berry, who heads EMI Recorded Music and would be chief operating officer of the merged company.

Time Warner agreed to pay EMI shareholders a special $1.2 billion cash payment shortly after completion of the merger, which still needs regulatory approval. Time Warner comes fresh from a $145 billion merger deal with U.S. Internet access group, America Online.

But the jury remains out as to whether shareholders will be convinced by the deal's complex structure and the limited up-front payout.

While EMI shares jumped to a high when the deal was frst unveiled, they swiftly retreated, and fund managers speculated that Time Warner may have to revise the terms of the deal.

"I think EMI shareholders are likely to be underwhelmed by this...EMI shareholders wanted a full takeout and a 50-50 joint venture with Time Warner holding a golden share is not what they anticipated," Jeremy Batstone of NatWest Stockbrokers told Reuters Television.

EMI chairman Eric Nicoli and Time Warner president Richard Parsons are to be co-chairmen of the merged music company.

"If there is such a thing as a perfect fit, Warner EMI Music is it," Parsons said in a statement.

The companies said they complement each other geographically, with Warner Music Group's strength in the United States and EMI holding's strong market positions across Europe and elsewhere.

The enlarged group would be a leading source of music in shops and on the increasingly important Internet. Time Warner's merger with America Online offers EMI an unprecedented opportunity to sell music for direct downloading by computer.

"It enhances our ability to realize the opportunities present by the Internet and other new media, and it will allow us to deliver all of our main strategic objectives in a dramatically shorter timeframe," Nicoli said of the merger.

"The timing of this agreement could not be better as our industry embraces the digital revolution."

"Like the AOL-Time Warner deal, this will accelerate the ability of people to download music online," Anthony DeCurtis, contributing editor of Rolling Stone told CBS Radio News, "but it's not going to make record stores disappear."

Still, said DeCurtis, "It's going to make the Internet a much bigger aspect of how people get their music."

The merger comes at a crucial time for Warner and EMI.

Warner Music's earnings fell from $288 million in the first nine months of 1998 to $279 million for the same period in 1999. EMI has been recovering from difficulties of its own, but in the six months ending in September last year, profits were up by 61 percent to $108 million, compared to the same period the year before.

The deal worries Strauss.

"We've got a situation where in the last 14 months we've been going from six major labels to four major labels," he told CBS Radio News. "It's just a lot of power in the hands of a few, and if you combine that with the fact that AOL just bought Time Warner, it's unbelievable."

The new company is to be structured as two joint ventures, with identical boards co-led by Nicoli and Parsons. The boards would comprise six Time Warner representatives and five from EMI.

Warner EMI Music's chief executive is to be Roger Ames, currently chairman and chief executive of Warner Music Group. It will be headquartered in New York, with international headquarters in London.

EMI would retain its listing on the London Stock Exchange and continue to be owned by its existing shreholders.

The partners expect to complete the merger during the second half of 2000.

EMI has been seen as a possible takeover target since 1996, when it left the Thorn group. It considered a deal with Universal's owner, Seagram, in 1998, but the talks came to nothing. EMI's share price surged last week on speculation it was close to striking a deal with Germany's Bertelsmann media group.

"This is certainly not the knock-out deal shareholders would have been looking for given that EMI is such a unique asset. There could be some feet dragging on voting this one through and they may have to provide a sweetener," said one fund manager.

Some analysts speculated that Warner's move on EMI - a perennial target of takeover speculation - may yet be challenged by rivals.

"I think we will see a third party coming in to the deal," said Lorna Tilbian, media analyst at WestLB Panmure.

"Once the regulatory constraints are addressed it will give a third party a chance. It could be one of the U.S. majors that lack music - Disney Corp or News Corp - it could be Yahoo!."

However, EMI Chairman Eric Nicoli played down the idea, saying he had received no bid approaches, while Germany's Bertelsmann AG declared it had no intention of launching a counter-bid.

Some analysts added that few of the speculated potential bidders, which also included Sony Corp.'s Sony Music, would want to take on Time Warner.

©2000 CBS Worldwide Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press and Reuters contributed to this report