Sony BMG Loses EU’s Merger OK

In an unexpected move that rocked the global music industry, one of Europe’s highest courts Thursday threw out regulators’ approval of the 2004 merger that created Sony BMG Music Entertainment, the second-largest music company in the world.

The European Union’s Court of First Instance ruled that regulators had made a “manifest error” when they approved uniting the music units of Japan’s Sony Corp. and Germany’s Bertelsmann. The court found that regulators did not sufficiently investigate whether the combination would create a monopoly.

The decision, which came in response to a challenge filed on behalf of 2,500 independent music labels, caught executives at Sony, Bertelsmann and Sony BMG by surprise. Sources at the companies said they would re-submit the deal for approval within a week. A decision could take as long as five months.

If that petition fails, executives may be forced to undo the partnership that collected $4.2 billion in revenue last year and was responsible for more than 25% of U.S. album sales. The Sony BMG combination reduced the world’s major record companies to four and brought such artists as Aerosmith, Barbra Streisand and Elvis Presley under one roof.

Whatever the outcome, Thursday’s decision put an immediate chill on negotiations between EMI Group and Warner Music Group -- the world’s third- and fourth-largest music companies, respectively. Insiders at both companies said further talks about combining them were unlikely until the Sony BMG issue was resolved.

The court’s complete annulment -- the first of its kind -- could remake landscapes within the industry and elsewhere.

“This is uncharted territory,” said Ian Forrester, a Brussels-based antitrust attorney at White & Case. “This could signal that there will be many fewer European mergers. It could call into question approval of mergers from the past half-decade.”

Sony’s U.S.-listed shares fell 3.9%, while EMI slid 9.2% in London, its biggest decline since February 2005. Warner shares fell $5.23, or 18%, their largest one-day drop since the company went public last year. Bertelsmann is not publicly traded.

In an e-mail to employees, Sony BMG Chairman Rolf Schmidt-Holtz said the court’s decision “will have no immediate effect on the day-to-day running of the Sony BMG joint venture, which continues with business as usual.”

What effect the decision will have on consumers is less clear. Sony BMG has lost more than 3% of its world market share since the companies were combined and has been racked by internal power struggles.

“I don’t think consumers would even notice if this merger was undone,” said Geoff Mayfield, an analyst at Billboard magazine. “Before the industry consolidated, labels released about 30,000 albums a year. Now there are fewer companies, but digital distribution makes it possible for even the smallest independent musician to release an album. Last year, over 61,000 albums were released. You can’t tell me that consolidation has created less choice.”

This is not the first time that decisions by European regulators have threatened to scuttle a deal. In 2001, General Electric Co. called off its purchase of Honeywell International Inc. in what would have been the largest industrial acquisition in history after European regulators failed to approve the deal, citing fears that it would stifle competition for aircraft jet engines.

The same court that issued the Sony BMG ruling is also examining part of a 2004 ruling by the EU ordering Microsoft Corp. to end anti-competitive practices and to share sensitive information with rivals.

Thursday’s 80-page ruling said the 2004 European Commission examination of the Sony BMG deal was inadequate, and “did not include all the relevant data that ought to have been taken into account by the commission.”

The court said evidence produced by Impala, the independent trade group challenging the merger, suggested that the commission had not sufficiently shown that the merger would not encourage monopolistic behavior. For instance, Sony BMG theoretically could force rivals to conspire on pricing by threatening to exclude them from compilation CDs, the court said.

Once the companies have reapplied, the European Commission will have five months to consider the matter again.

“We may very well reapprove the Sony BMG merger,” commission spokesman Jonathan Todd said. “But it’s also possible that we’ll reach different conclusion. We have more data about the merger now.”

Some Bertelsmann executives said they were confident that the deal would be reapproved.

“The fact is that Sony BMG has lost market share,” said one senior Bertelsmann official who requested anonymity to avoid drawing regulators’ attention. “If anything, the merger has made us weaker.”

But other executives appeared more concerned. Sony Corp. Chairman Howard Stringer, who was attending Herb Allen’s media summit in Sun Valley, Idaho, huddled with Sony Chief Financial Officer Rob Wiesenthal after the ruling came out. Wiesenthal said neither of them had read the ruling.

Executives at Sony BMG said they were in shock. “Nobody expected this,” said one Sony BMG executive who requested anonymity. “If we had to, we could split the company. But it would be enormously expensive.”

In the months after the Sony BMG merger, executives shuttered dozens of overlapping departments and fired more than 2,000 employees.

An Impala spokeswoman, Helen Smith, said the group was “delighted and amazed” by the ruling and called it “a victory for music and cultural diversity.” In its challenge, the group had alleged that a consolidated music industry sidelined non-mainstream musicians whose work did not have worldwide appeal.

Independent U.S. labels saw opportunity in the legal fracas.

“For the next two years, Sony BMG is going to be distracted by defending its merger and coming up with restructuring plans in case they are forced to break up,” said Steve Gottlieb, president of TVT Records, one of the nation’s most successful indie labels. That, he added, “will give us a chance to capture their sales.”

Two companies that are far less enthusiastic about the decision are Warner Music and EMI. Since May, the rivals have been trading acquisition bids of as much as $4.6 billion apiece. Until Thursday, insiders at both companies said a deal would probably occur within the month.

After the ruling, EMI Chairman Eric Nicoli told reporters in London that his company would not have bid on Warner “if we thought we could not receive regulatory approval. There’s no reason at this stage to change that view.”

But Warner executives say such optimism is unwarranted.

“Everything is completely on hold now,” said one Warner insider who requested anonymity. “Overnight, the chances of this deal happening anytime soon just plummeted.”

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Times staff writer Sallie Hofmeister contributed to this report.