Southgate Stands Firm at Helm as Storms Swirl Around EMI

EMI Group Chairman Sir Colin Southgate knows what it’s like to be in the hot seat.

For the last two years, EMI--the London-based company that Southgate built into a global music powerhouse selling records by such stars as the Spice Girls and the Beatles--has been dogged by sinking profit and management upheaval.

A few weeks ago, EMI’s stock plunged again, hitting a six-year low after the company issued a warning that its first-half operating profit would drop 20%.

The profit alert came just months after EMI was left at the altar by Seagram Co., which bought PolyGram instead. Critics blamed Southgate for bungling the sale by overplaying his hand and refusing to take less than $9 billion for EMI.

Critics spoke up again when EMI’s name showed up this summer on a list of potential buyers for PolyGram Filmed Entertainment. After EMI’s board rejected his plan to bid for PolyGram Filmed, rumors began circulating that Southgate was being pressured to step down.

Southgate, who has run EMI for nearly a decade, denies that his job is in jeopardy or that his company is in danger of tanking. In a rare interview, the charismatic 60-year-old chairman defended his track record and spoke about the troubles facing EMI and its competitors in the volatile global record business. Southgate spoke by telephone from New York.

Question: Things look pretty bleak right now for EMI. What went wrong?

Answer: I don’t think our problems are any different than the rest of the music industry. Right now, the recorded-music markets are terrible all around the world--except for in America. We’re obviously having to live with the weak market and the fact that our releases this year are not as strong as last year. We have those sort of troubles. But our music publishing business is very strong. And in the United States, our music labels are having the best year we’ve ever had.

Q: EMI’s stock has tumbled significantly in the past two years.

A: So has the market, my friend. The perception of the music market at the moment is not very good. I don’t know what people expect. I guess they single out EMI because we are so visible. We get a lot of attention because we have to show all our music figures. Nobody else has to do that.

What about these other companies who used to have double-digit return on sales and are now wallowing in single digits? I mean, take Sony Music; they’re just chasing market share and not worrying about profits. They used to get 16% return on sales and now they are down below 8%, aren’t they? And what about music profits at Warner and Bertelsmann? They’re both struggling. I don’t think anybody is having a great time out there right now.

Q: Before Seagram chief Edgar Bronfman Jr. put in a $10.4-billion bid for PolyGram in May, he approached you.

A: They talked to us, yeah.

Q: It has been reported that Seagram bid about $11 a share for EMI.

A: Not true. They never put a formal bid in. And whatever they talked to us about, it was nowhere near that figure.

Q: How much did they offer then?

A: I can’t say. Considerably lower than that though, I can assure you. You have to remember that the market situation at that time was one thing and the situation today is totally different. The economies of the market have fallen apart since then. Why don’t you ring up Edgar and ask him how he feels now about overpaying so badly for PolyGram?

Q: Some of your critics think you drove Seagram away by overplaying your hand. EMI’s market cap is now about $4.4 billion--down significantly from $8 billion earlier this year. Do you regret not selling when the market was stronger?

A: No. This is a great company. It doesn’t need to be sold.

Q: Michael Dornemann, chief of Bertelsmann Music Group, has suggested recently that his privately held German corporation might consider buying EMI if the price drops enough.

A: Dornemann sure talks a lot of rubbish, doesn’t he? What makes him talk about us like that? Where are his company’s results? We never see them, do we? Why don’t you ask him how his record club is doing at the moment? From what I hear, it’s in the toilet. I realize that there is a lot of nonsense floating around out there about people wanting to buy us. People should know better by now, but apparently they don’t.

Q: How about the rumor that News Corp. chief Rupert Murdoch is interested in EMI?

A: Is he? That’s news to me.

Q: You never had a discussion with him?

A: I meet him occasionally, but I have never had a discussion with him about buying EMI. I don’t think EMI is on his agenda at all.

Q: Does it bother you that many people in the music industry view EMI as a sitting duck now?

A: I don’t feel that EMI is a sitting duck any more than anybody else. I think our business is in a very difficult market, but we are doing pretty bloody well, considering the circumstances. I don’t feel guilty or under pressure or anything else. The question is, who is going to come after it in this market? Most everybody is looking to their own problems right now. The week after we announced our trading statement, 10 other companies did the same thing. Disney just put out a profit warning. Everybody around the world is fluctuating with the markets. I guarantee you that you’re going to see a lot more of these warnings in the future.

Q: After the Seagram deal collapsed, you considered an expansion into movies by bidding on PolyGram Filmed Entertainment. At the last second, EMI’s board rejected the idea. What’s your strategy now?

A: We are a global company with terrific worldwide distribution and our strategy is to look at every opportunity that utilizes our strengths. Our background is in intellectual property in the creative world, primarily through recorded music and publishing. We understand the risk management, the creative people, the entire crazy process. If we think something can tap into our strengths and add value to the business, we’ll definitely look at it. Initially we thought PFE fit our criteria. But when we did the financials on it, it didn’t really come up to scratch. The profit flow coming from the catalog was not as good as in the Goldman Sachs books. It was disappointing.

Q: Any truth to rumors that the board has been pressuring you to step down?

A: No truth to that at all. In fact, I just wrote a note to all my guys telling them not to believe what you read in the papers. I told them that I’m here to stay until the next millennium.

Q: Earlier this year, you suggested that you might step down as chairman once you turned 60. You’re 60 now.

A: At some point in the not-too-distant future we will focus on looking for somebody to run the business on a day-to-day basis. At some stage or other, we intend to look for a successor at the chief executive level, but we’re in no hurry. We’ll do it in due time.

Q: So you will step down when you hire a chief executive?

A: I would become a non-executive chairman.

Q: How do you see things shaping up in 1999?

A: I think that next year will be pretty tough for the entire industry. I can’t believe that Asia and the developing world are going to come quickly out of these economic problems. A lot of what will happen depends on whether we have another crisis somewhere else and how the economies in the Western world hold up.

Q: So are you pessimistic about the future of the music business?

A: No. Of course not. These things come and go, don’t they? That’s what life is about. A year from now, it will look totally different . . . we hope.