EMI, Warner Call the Whole Thing Off

After weeks of marathon negotiations with Europe's regulatory authorities, EMI and Time Warner say they are scrapping their $US20 billion merger plans.

It was the Internet that caused EMI to seek a partnership with Time Warner in the first place. And so it makes a certain kind of sense that concerns about their potential to dominate the global market for digital music are sending the two companies back to the drawing board.

The companies withdrew their formal application to the European Commission on Thursday, citing an inability to reach an agreement within the Commission's stringent time frame. The deadline for a decision on the merger was set for Oct. 18, but sources say an internal decision had to be taken this week to give the European Union's 15 member nations an opportunity to review it.

"The withdrawal of our application allows additional time to reassess regulators' concerns and to pursue solutions simultaneously in Europe and the U.S.," said EMI Chairman Eric Nicoli in a statement.

The two companies say they will start the merger negotiations over again, taking into account what they now know about the regulatory concerns of the European Commission. Any new agreement they come up with would also need the approval of their shareholders.

"We will continue to explore ways to structure a combination that will make sense for the two companies and will be acceptable to the Commission," said Time Warner President Richard Parsons.

The surprise announcement came as many news organizations were reporting that the Commission was close to approving the merger. A group of European independent record labels had withdrawn their opposition to the merger after EMI reportedly offered to sell Virgin Records and Time Warner had offered to sell Chappell Music, part of its Warner Chappell music publishing business.

In the end, though, the concessions demanded by the Commission were beginning to erode the rationale for the merger. The Commission was said to be asking for divestments that would allow for the creation of another major label to replace the one that would vanish as a result of the merger.

EMI is one of two major record labels not affiliated with a multinational conglomerate. The other, Universal Music Group, will soon be connected to French media and utilities giant Vivendi. The European Commission is also taking a look at that merger, but Vivendi officials say they are optimistic their merger will soon be approved.

News that the merger is off pushed EMI shares down more than 5, percent to 527 pence ($US7.66) on London's FTSE index. Convinced that EMI cannot compete effectively without proprietary access to digital distribution, investors pushed EMI shares to 810 pence ($US13.24) in January of this year when the merger with Time Warner was announced.

Aside from its pending affiliation with AOL, Time Warner has a formidable digital distribution network, including three cable networks and a controlling interest in the Road Runner and Time Warner Telecom cable systems.

But Time Warner-AOL isn't the only potential suitor for EMI. Bertelsmann's BMG is the other major label most often mentioned in connection with EMI, but a host of well-funded but content-starved telecommunications companies could move in, too.

Breakingnews.com financial analyst Hugo Dixon predicted that besides BMG, EMI could pursue a merger with a global media company that lacks a music arm, such as Disney, News Corp. or Viacom, or with telecommunications companies like Spain's Telefonica or France Telecom.

The withdrawal of the EMI-Time Warner merger is not expected to affect the merger deal of Time Warner and AOL, which is also before the Commission. Most media reports from Brussels predict that this deal will win approval. But as the sudden withdrawal of EMI and Time Warner illustrates, anything can happen with the Commission.

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