EU Says Sony-Bertelsmann Merger Approved in Error

The European Union’s second-highest court has struck down the regulatory approval of the merger of Sony Music and the music business of Bertelsmann nearly two years after the deal was completed.

While the decision could force the undoing of the earlier merger, which created Sony BMG, it may also undermine ongoing merger talks between Warner Music Group and EMI. Those two companies have been exchanging proposals for what would likely be a US$4 billion merger.

Taking a Second Look

In a statement, Warner Music Group said it was “in the process of reviewing today’s decision” and attempting to determine “what impact it might have on a potential combination of Warner Music Group and EMI Group.”

For its part, Bertelsmann said it believed the music joint venture was on solid ground. “Today’s judgment does not affect the validity of the Sony BMG joint venture,” the company said in a statement. Sony BMG is the second-largest record company in the world.

The European Court of First Instance, based in Luxembourg, ruled Thursday that regulators did not do enough to evaluate the impact of the merger between Sony and Bertelsmann, which created Sony-BMG Music. EU regulators gave the project their approval in 2004 and the merger of the music units was completed about six months later.

The court ordered regulators to take another look at the merger, and members of the European Commission said the business could be forced to divest some of its assets as a result.

The commission could also appeal the decision and has two months to do so. Meanwhile, Sony and Bertelsmann have seven days to resubmit documents originally sought to evaluate the antitrust impacts of the merger.

Ripple Effects

The ruling represents the first time the European high court has overturned regulators on a merger clearance decision. Europe has become a hotbed of antitrust scrutiny of late, with major cases involving Microsoft and others garnering worldwide attention.

The ruling came after a challenge from independent record label group Impala, which represents some 2,500 music firms. The court found that regulators failed to properly establish that there was not a monopoly position in place ahead of the merger or that the merger would not create a monopolistic situation.

Before that merger, there were five major record labels. With four now in existence, regulators were expected to be wary of the plan to reduce that number to three by allowing Sony to merge with EMI. The ruling may be enough to halt those merger discussions for the time being.

The court found that while regulators put forth a theory that promotional discounts prevent a monopoly from being established, they failed to properly document or prove that notion. The regulators also should have given more consideration, the court said, to potentially aggressive activity from major labels, such as excluding some artists or record labels from having their songs included in compilations.

Regulators conducted what it considered to be an “extremely cursory examination” of the antitrust ramifications of the deal, the court said.

How Many?

Warner and EMI had discussed merging as long as four years ago, but shelved that idea when EU regulators raised concerns about prices and other impacts on consumers.

The EMI-Warner merger was expected to be a boon for the music industry, which has struggled to retain growth and profits amid the changing landscape of digital music delivery. More consolidation would give labels larger stables of artists to work with and create additional distribution opportunities.

Consolidation “is an inevitable part of the period of readjustment that the music industry is going through post CD replacement cycle and in the face of piracy and DVD game console competition,” said JupiterResearch analyst Mark Mulligan.

The focus of the merger from the beginning, he added was “on survival, not increasing market share.”

Mulligan noted that the Sony BMG deal clearance seemed to come with a warning from regulators when it occurred that further combinations would be looked at in a less favorable light.

The Sony BMG ruling would throw cold water on the Warner-EMI talks and may force any talk of combining to be put on hold pending outcome of the EU’s second decision on the original merger, according to American Technology Research analyst P.J. McNealy.

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