We've been sitting on this information for months, trying to independently verify the details. Now, we've got three, reliable sources telling us essentially the same thing, including former Warner Music Group chairman Edgar Bronfman, Jr. And the gist of it is this: if regulators on either side of the Atlantic reject the purchase of EMI on anticompetitive grounds, Universal Music Group still has to pay for it - in whole, or in part. Which boils down to an estimated liability of approximately $700 million.
This isn't a regulatory slam dunk, by any stretch, which is why UMG had to pad the deal to get EMI to dance - especially given the presence of lower offers. "It's deal insurance, [EMI] gets the spread on the next best offer," one investor tied into the negotiations first told Digital Music News. "It means that if it gets denied [at $1.9 billion], and EMI accepts the competing offer of $1.2 billion, then Universal pays the difference, $700 million."
So who was offering $1.2 billion? According to the same sources, that would Len Blavatnik, the Russian billionaire owner of Warner Music Group. Which might explain why Bronfman - now technically a 'Director' at Warner - was making the case against the merger in front of Senators last week. And, exposing details of the 'deal insurance' premiums offered by Universal Music. "I think the three words from the movie All the Presidents Men is useful: 'follow the money'," Bronfman told Wisconsin Senator Herb Kohl during the Thursday deliberations.
There are competing versions of exactly how this 'insurance' plan would be constructed. One version calls for UMG to simply pay the difference between its offer and the next best offer - ie, that of Warner Music Group or a third buyer. The second finds Universal paying the entire $1.9 billion post-rejection, and getting reimbursed on the difference. "If it doesn't achieve regulatory approval, the business goes back to [owner] Citi, Citi has to sell it in a distressed sale to someone else, and remit whatever price they get to Universal," Bronfman further described.
All of which sounds like ridiculous financial irresponsibility to those on the sidelines. According to a fourth source who was unfamiliar with the 'insurance' contingencies but close to the players involved, a major explanation for this style of overpayment is simply maniacal egomania. "So [current UMG chairman Lucian] Grainge kicks out [former chairman] Doug Morris, then Morris and his executive cadre start kicking butt on marketshare [at Sony Music]," the source described. "In response, they were just trying to get the deal done to trump marketshare and not looking at this economically."
Oh, the multi-billion-dollar details. Forget about the $700 million liability for one moment, because this source further described a rather desperate attempt by UMG chairman Lucian Grainge to muster the full, $1.9 billion required to swallow EMI. "I really don't think they have the money to comfortably get this done," the fourth source continued. That partly explains moves to divest hundreds of million in 'non-strategic assets,' as well as the decision to purge the company of remaining millionaire executives in North America. Earlier, sources noted that UMG still has about twenty-five executives on its payroll earning more than $1 million, with a few scoring more than $10 million (yes, a year).
But the situation is even more unstable than you may realize, thanks to recent stock plunges at UMG parent Vivendi. That includes successive cliff-jumps in March and mid-April, though some recovery has occurred more recently. Either way, it appears that Vivendi is expanding its efforts to shave costs: just recently, Le Journal du Dimanche pointed to near-term cuts of roughly $1 billion at mobile unit SFR.
Beyond that, Vivendi is also rumored to be actively considering a spinoff of one or more units to better position itself on world markets. That could include a jettison of UMG. "If there's a free-standing spinoff, $1.9 billion may not be happening," the first source said.
AzzaBagdad Sunday, June 24, 2012
Wow...UMG as ballast. One man's trash is another man's treasure. That's what Citi would have you believe anyway.
AzzaBagdad Sunday, June 24, 2012
Sorry, I meant jettison! Not ballast! 2:15 am here in Ireland, quite tired!
@the_jenius Sunday, June 24, 2012
@nuplays Monday, June 25, 2012
Is the "deal insurance" that Universal made is usual practice in such transactions?