Time Warner, EMI Deal May Lead to Layoffs

Executives of Time Warner and EMI on Monday projected another wave of job cuts and the shedding of some artists from their recording labels as they formally announced the $20-billion merger of their music businesses.

The proposed merger was unveiled at a London news conference at which the combined companies’ access to the Internet--which is expected to become a major distribution medium for recorded music in coming years--took center stage.

Time Warner, after its proposed merger with America Online, would become one of the world’s leading Internet companies, making it a more alluring partner to EMI.

But executives of the two companies also disclosed that to realize $400 million in annual operating savings, they expect to lay off about 3,000 workers among the 22,500 they currently employ. The layoffs will take place during the next three years, said Ken Berry, chief executive of EMI Recorded Music and the projected chief operating officer of the merged company.

“The two companies belong together,” said Richard Parsons, president of Time Warner and co-chairman-designate of the proposed new Warner EMI Music, at the London news conference.

“This is a marriage made in heaven,” he said, citing the merged company’s ability to find and sign new acts as “digital technology revolutionizes access to every form of music.”

EMI Group Chairman Eric Nicoli, who also would become co-chairman of the combined company, said the deal “enhances our ability to realize the opportunities presented by the Internet and other new media.”

The deal would reduce the number of major international record companies, which numbered six as recently as 1998, to four--Warner EMI, Universal (which acquired PolyGram in 1998), Sony and Bertelsmann. That’s likely to raise the hackles of government regulators, consumer advocates and executives of other entertainment companies without strong music operations.

Walt Disney Co. Chairman Michael Eisner, for instance, assailed the proposal Monday for its potential to create a near monopoly in music publishing.

“If allowed to go through exactly as planned, the music publishing world would be completely dominated by one company, and that would not be good for everybody,” Eisner said during a conference call with securities analysts Monday. The call was scheduled in connection with Disney’s quarterly earnings report.

Eisner noted that Disney was forced to negotiate with other companies when it signed Elton John to write and perform music for “The Lion King” and Phil Collins for “Tarzan”--negotiations that will become more difficult as the number of music companies shrinks.

“I liked it when we had five big players,” he said. “I liked it better when you had six big players.”

Although the Time Warner-EMI merger has been under negotiation since the middle of last year, the plan comes on the heels of Time Warner’s proposed merger with America Online--a deal tailor-made to improve Time Warner’s transformation into a purveyor of digital entertainment.

Entertainment industry observers have long perceived that the first opportunities to be exploited in digital distribution of content would come in music, which is relatively easy to transmit over the Internet. Many in the business believe the Warner-EMI venture underscores how recording labels are shifting from viewing the Internet as a threat to seeking to take advantage of its efficiencies.

As reported, the terms of the deal call for Time Warner and EMI to merge their music companies into a joint venture to be known as Warner EMI Music. The venture would be headquartered in New York with “international headquarters” in London, the seat of EMI Group.

With $8 billion in annual revenue, the venture would be the largest music company on the basis of overall sales, including music publishing. In record sales alone, however, it would trail Universal Music Group, which has 25% of the worldwide market, compared with a combined 20% for Time Warner and EMI.

Time Warner would pay EMI shareholders about $1.60 per share as a control premium for a total of $1.2 billion; that means Time Warner would have six representatives on the board to EMI’s five.

EMI would continue to be listed on the London Stock Exchange, with its shares mostly reflecting the performance of Warner EMI Music, its largest asset. EMI Group also owns a stake in Viva, a European music channel, Channel 5 and HMV, the music retailer.

Under the deal, Time Warner would gain an 8% ownership stake in EMI if the latter’s shares rise to about $16 a share within 3 1/2 years of the deal’s closing, which is expected late this year. EMI shares rose about $11.52, in Monday’s London trading.

Some industry observers speculated that the terms of the proposed deal might be a disappointment for EMI shareholders. The company has long been considered a takeover quarry for an entertainment conglomerate seeking entree to the music industry. Potential suitors have been turned off by EMI’s high price of as much as $10 billion, however.

Time Warner finessed that obstacle by contributing its own music operations to the venture, which allowed it to offer only $1.2 billion in cash to EMI shareholders.

Industry analysts said the high price of buying all of EMI would still discourage companies contemplating a counterbid. Moreover, media companies without strong music operations of their own would be unable to extract the operational savings Warner-EMI is expected to throw off.

That will make it difficult for such oft-mentioned suitors as Rupert Murdoch’s News Corp. or Viacom Inc., neither of which is a factor in recorded music, to assemble a bid. Another potential suitor, Germany’s privately held Bertelsmann, would face a culture clash in acquiring the British EMI.

“I think it’s unlikely that someone else steps in,” said Christopher P. Dixon, media analyst for PaineWebber Securities.

Time Warner and EMI made clear Monday that most of the immediate gains from the merger will come from paring expenses. Although most of those cuts would be made in manufacturing and distribution operations, Berry also said the companies’ artist rosters would also undergo “a review and a rationalization.”

Berry’s remarks presage another wrenching period for the music industry, similar to the one after the 1998 merger of Universal and PolyGram. That deal, which created the world’s largest music company, led to layoffs of about 3,000 employees from the companies’ combined work force of 15,500.

More importantly, it resulted in the consolidation of 15 record labels into four major music groups and the paring of hundreds of artists from the combined labels’ repertoires. Universal’s goal was to save $300 million annually.

Music industry observers said they expected the cuts at Warner EMI to fall less heavily on labels and artists, in part because the companies will be able to save millions by trimming office and management staffs. Among the overlapping businesses, for example, is music publishing, which comprises EMI Music Publishing and Los Angeles-based Warner/Chappell.

“The publishing divisions are very scalable businesses,” said Michael Nathanson, entertainment analyst for the research firm of Sanford C. Bernstein and Co. “That’s one place you could see large cuts. You could live with one of those two operations.”

In general, EMI is stronger in Europe and Warner in the U.S., suggesting the weaker operations in each region might be consolidated into the stronger, he said.

Some observers say the merged company would place a high priority on improving the performance of some lagging labels. These include EMI’s Los Angeles-based Virgin, Priority and Capitol Records and Time Warner’s Warner Bros. Records, all of which have slipped badly in market share in recent years.

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Times staff writer Chuck Philips and Janet Stobart of the Times’ London bureau contributed to this report.