In Turmoil, EMI Grapples With Talk of a Takeover

Behind closed doors this morning on the top floor of EMI Group headquarters near London’s Hanover Square, the firm’s outside directors will assemble to discuss a leadership crisis at the company that releases music by such pop stars as Garth Brooks and the Rolling Stones.

Plagued by corporate infighting and sinking profit, the future of the giant British conglomerate, analysts say, is hanging in the balance--with industry speculation mounting that the company is ripe for a takeover.

Over the last year, EMI shares have struggled as the board shut down two New York labels, fired its top U.S. executives and bungled several attempts to implement a corporate succession plan. The latest upset occurred last month when James Fifield, the company’s chief executive for the last decade, refused to sign a contract extension after longtime Chairman Sir Colin Southgate reneged on a pledge to step down.

The news prompted a scathing editorial in the Times of London blasting the board for the firm’s under-performance and management problems. EMI stock, which plunged in January following a profit warning, has since rebounded amid rumors that Seagram Co. and Walt Disney Co. were analyzing a possible purchase.

“From the outside, it does not look very good the way all this was handled,” said Harold Vogel, entertainment analyst for Cowen & Co. “It’s not clear from the outside who is going to end up running this company. It opens up a lot of questions about the future.”

Analysts and shareholders aren’t the only ones asking questions. The company’s top music executives under Fifield, Ken Berry and Martin Bandier, flew to London for this morning’s meeting to voice their concerns over who will take the reins at the company.

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Fifield, Berry and Bandier--who sources say are all disturbed by the recent developments within EMI--would not comment.

In a phone interview from London, Southgate acknowledged that EMI was going through a “bumpy” period, but denied that the company was for sale.

“It’s rubbish,” Southgate said. “I have had no conversations in the last week or so with Seagram or Disney or anybody else. And as far as I’m concerned, the company is independent and in great shape financially, thank you very much. Our cash flow is strong. Like everybody else, however, we’re slugging it out in what, at this point in time, is a lousy flat market for music worldwide. But we’re pushing forward.”

Southgate scoffed at recent reports in the British media that the board has made the company more vulnerable as a takeover target due to its current leadership vacuum.

“Nonsense! There has been no change in our management team whatsoever,” Southgate said. “I’ve been in this job 13 bloody years and I love it. Jim Fifield, our CEO for the last 10 years, remains under contract until March 31, 1999. And reporting to Jim are Ken and Marty, two of the best executives working in the music world today. We’re in great form.”

Not everybody at EMI is so upbeat. In January the firm projected a 10% decline in profit when its year-end results are announced on May 27.

Considering that sales for recent blockbuster hits by Garth Brooks and the Spice Girls will soon slow down, EMI may have more trouble next year. Smashing Pumpkins, EMI’s biggest star with an album due, has notified the company that it intends to break its contract.

Sources say morale among employees has plummeted in recent months at its record labels, Virgin and Capitol, where one wary high-level executive chose recently to renew his contract for only one year. And analysts have been scratching their heads for nearly a year as they have watched Southgate and his board flip-flop several times in restructuring the company’s corporate hierarchy.

In May, the board decided to fire Charles Koppelman and close his unprofitable North American EMI division--just months after granting him a lengthy, multimillion-dollar contract extension. As part of the restructuring, Berry, chairman of EMI’s international sector, was promoted to oversee all of EMI’s North American labels.

By September, Southgate was privately telling people within the company that he regarded Berry as the likely successor when Fifield stepped down.

There was even talk within the organization that Berry might be tapped as Southgate’s successor.

But sources say Southgate and the board had a change of heart after Berry promoted his wife, Nancy, to vice chair of Virgin Records America and Virgin Music Worldwide without running her elevation up the corporate flagpole. Critics said that Nancy Berry, who was formerly executive vice president at Virgin, rose only through nepotism, and their anger about her promotion spilled into the media, with a mean-spirited Forbes article last fall describing her as a former groupie.

Sources say the board also had concerns that Ken Berry was overworked and may have needed more time to blossom into a chief executive or chairman role at EMI. Whatever the reason, Southgate reached out to Fifield in December and asked if he would consider extending his deal until 2002.

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Fifield, a former General Mills Inc. executive, is credited with helping transform EMI into the third-biggest music conglomerate in the world over the last 10 years. EMI’s worldwide market share has risen from 10% to 15% during his tenure, primarily by acquiring Virgin Records, Sparrow Records and other labels. He also bought EMI Music Publishing, which has become the largest music publishing operation on the planet.

Southgate, who had taken on additional duties as the chairman of London’s Royal Opera House, suggested to Fifield that he was considering retiring. Although Southgate and Fifield have long quarreled behind the scenes, the two executives reportedly buried the hatchet in January and worked out a deal to extend Fifield’s contract with a provision that he report directly to EMI’s board, sources said.

Fifield flew to London expecting the new deal to be announced at a Feb. 20 board meeting. That didn’t happen and Fifield was told that he would continue to report to Southgate, sources said. He rejected the offer and abruptly returned to New York.

On Feb. 26, Southgate summoned Berry and Bandier to London to explain the board’s sudden change of plans. Over the last two weeks, the idea has been floated that the board may bring in an interim chief executive to replace Fifield, should he decide to leave before his contract ends.

That individual could be promoted to chairman if Southgate steps down this summer, sources said. There is also speculation within the organization that EMI might decide to operate without a CEO, removing a layer of management from the corporate hierarchy.

Sources say Berry and Bandier are opposed to having an outsider unfamiliar with the intricacies of the music business brought in above them. Southgate says he expects Berry and Bandier to raise their concerns to the outside directors this morning.

“There is no crisis here, nothing that needs to be urgently resolved,” Southfield said. “EMI is in great shape. I reach retirement age in July when I turn 60. By then, either somebody will come in to replace me, or if we haven’t found someone, I’ll stay on. I promise you I am not going to leave this company in a mess.”