Citigroup is apparently very motivated to dump EMI Music, considered toxic in certain circles.
But according to sources interviewed by Digital Music News this week, the valuations surrounding EMI Music are likely to get driven further downward in current negotiations. And it has nothing to do with piracy, access to capital, or a ruinous history with Guy Hands.
Those are serious concerns, but this goes further back. That is, thirty-five years back. That’s because of the ‘termination clause’ time bomb, a section in the Copyright Act of 1976 already being tested by certain rights owners (more on that here).
And, EMI is sitting on a lot of very, very valuable catalog. “If EMI were sold ten years ago, it wouldn’t have made a difference,” one investor told Digital Music News. “Now, it’s a factor, and [investors] will be going back to look at every piece of catalog.”
The majors could fight this, and that’s certainly been their modus operandi in the past. But according to a recent close-up by the New York Times, labels are arguing over whether this is the best move. Because if they lose, they lose big: artists would take everything back, and that includes a huge chunk of revenue. “Some of the major labels favor a court battle, no matter how long or costly it might be,” the Times’ Larry Rohter explains. “Others worry that taking an unyielding position could backfire if the case is lost, since musicians and songwriters would be so deeply alienated that they would refuse to negotiate new deals and insist on total control of all their recordings.”
See where is this all going? A court battle is expensive and drawn-out, which opens the possibility of compromise negotiations. But that instantly lessens the current value of these catalogs. “Most of the cases will be settled, and God forbid they get a court battle and lawsuit,” a lawyer close to the issue relayed.
Again, all of these risks and uncertainties lessen the current-day value of these catalogs. “If the transmission on a classic car is more likely to fail, then it diminishes the value of that automobile, period, whether it happens or not,” the lawyer continued.
Then, there are Congressional issues. Just this week, Democratic representative John Conyers introduced legislation that would clarify the termination clause, and roundly hand rights back to the original authors. No court battles, just rights transfers. “For too long the work of musicians has been used to create enormous profits for record labels, radio stations and others, without fairly distributing these profits to the artists,” Conyers told members of the House Judiciary Committee.
Of course, this goes beyond EMI, though timing is everything. In fact, one source mused that the valuation surrounding Warner Music Group could have been compromised if the sale process were happening right now. “The Russian may have paid too much,” the source joked.