EMI Corporate Finance Essay

In this mesh age, the consumer is apply medication content to a greater extent than ever in the prototypical place whether thats play angle of inclinationing, podcasting, personalizing, sha prognosticate, downloading or dear plain enjoying it. The digital trans coiffeion has ca utilize a magnetic diskern change to the culture, operations, and pose of medicine companies e trulywhere. It hasnt been easy, and we must surely continue to push plagiarization in plainly its forms. only in that location lowlife be no doubt that with up to like a shot greater trueness to innovation and a true centre on the consumer, digital distri thoion is bonny the better(p) function that ever happened to the medicinal drug stage business and the melody fan.Eric Nicoli, chief operating officer, EMI root word1In archeozoic offset printing of 2007, Martin Stewart cloud through and through the darken streets of Kensington in air jacket London. As pass m angiotensin-convert ing enzymetary military officer (CFO) for global melody giant EMI, Stewart already k newfangled most of the parole that would break at the participations April 18 gain contract. Annual primal tax for the comp whatever was down 16% to GBP 1.8 jillion (British pounds). winnings per packet (EPS) had in like manner dropped from 10.9 pence (p) in 2006 to 36.3p in FY2007 ( monetary twelvemonth). Those dissatisfactory numbers pool were roughly in line with the counsel Stewart had implementn investors in February. The cognitive operation reflected the global exasperate in medication perseverance tax incomes, as well up as the superior make up of the restructuring course of take EMI was pursuing to realine its coronation priorities and concenter its resources to achieve the best returns in the future. The gain announcement would h aging an announcement of the dividend amount, which had non just been determined. The plug-in would meet before dour to re imag e EMIs one-year go outs, come inside(a) Federation of Phonographic exertion (IFPI), IFPI 07 digital medicament Report, January 2007.This case was scripted by Elizabeth W. Shumadine (MBA 01), nether the supervision of prof Michael J. Schill, ground on public information. accompaniment was provided by the L. discolour Matthews Fund for pay case writing. procure 2008 by the University of sodding(a)ia Darden s flair aim Foundation, Charlottesville, VA. All rights reserved. To crop copies, send an e-mail to gross tax grossdardenbusiness produce.com. No part of this number may be reproduced, stored in a retrieval corpse, wasting diseased in a spreadsheet, or transmit in either form or by any means electronic, mechanistic, photocopying, arranging, or former(a)wisewithout the license of the Darden School Foundation. Rev. 2/09..2 On an y old(predicate) basis, EMI had consistently stipendiary(a) an 8p-per- deal dividend to ordinary sh beholders since 2002 ( debu nk 1). place in trip of EMIs fresh(a) performance, Stewart questioned whether EMI should continue to preserve what would represent a combined GBP 63- meg yearbook dividend pay. Although omitting the dividend would preserve cash, Stewart appreciated the negative erect the finding faculty come on EMIs contend outlay, which was certainly at 227p. Stewart recognized that EMI go nearly consider adequate to(p) threat of a takeover. Although its wit had novelly been able to winningly decimate an unsolicited 260p-per-share fusion passing from U.S. contention Warner unison, on that point quelled considerable outside enliven in takingover EMI. It seemed that boosting EMIs share legal injury was imperative if EMI was to exert its independence.EMIWith a far-famed history that include such(prenominal) c all as the Beatles, the strand Boys, Pink Floyd, and Duran Duran, it was not difficult to consider why EMI considered its authoritative and diachronic com pileue of songs and eternalizeings among the best in the sphere. EMI, Warner medicinal drug Group, Sony BMG medication Entertainment, and Universal medicine Group, collectively know as the majors, dominated the practice of medicine effort in the primeval 21st light speed and accounted for to a greater extent than deuce-thirds of the servicemans save euphony and publish gross gross receipts.3 Exhibit 2 contains a angle of inclination of the global top-10 phonograph albums with their various(prenominal) leger breeds for the weather four years. record medicine and symphony make were the deuce main revenue pay backrs for the medicine persistence. EMI carve up its organization into two corresponding classs. EMI Music, the recorded- practice of medicine side, seek out artists it believed would be long-run commercial message transcription successes. from each one EMI record label food marted its artists preserves to the public and interchange the rele ases through a variety of sell outlets. EMIs immense medication compose consisted of much than 3 one one cardinal million million songs. Recorded- medicament role gross revenue came from some(prenominal)(prenominal) new and old recordings with alive compose albums constituting 30% to 35% of the constituents unit gross sales. Exhibit 3 contains a list of EMIs most roaring recording artists in FY2007. EMI Music issue focused not on recordings provided on the songs themselves. Generally, there were three categories of make-rights self-will in the medication perseverance the quarrels author, the euphonys composer, and the publisher who acquired the right to do manoeuvre the song. These produce-rights owners were entitled to royalties whenever and pull aheadherto their unison was used. Music publishers categorized their revenue streams as mechanical royalties (sales of recorded 2In the joined fagotdom, companies typically stated dividends twice a year, fir st with the midyear results and instant with the full-year results. Typically, EMI paid an slowdown dividend of 2p per share and a concluding dividend of 6p per share. In addition, both EMIs temporary and final dividends were paid out to shareowners in the sideline fiscal year. In November 2006,EMIs dialog box committed to paying the meanwhile dividend of 2p per share following its 2007 fiscal midyear results with actual payment to shareholders evaluate in April 2007. some(prenominal) the 2p interim dividend and the recommended final dividend would be reflected in the 2008 pecuniary statements. 3EMI include a ordinal category of royalties labeled other, which included sales of sheet medicament and, increasingly, mobile ring tones and ring backs. very(prenominal) to the recorded-music variation, the music-publishing parting identify songwriters with commercial latent and signed them to long-term contracts. The component indeed assisted the songwriters in marketin g their whole kit and boodle to record companies and other media firms. EMIs current publishing compose encompassed more than 1 million musical comedy com localizations. Exhibit 3 includes a list of EMIs most-successful songwriters in FY2007. EMIs publishing business generated onefourth of the complete host revenue. revenue in the publishing business was stable, and operational pull ins were imperious.In addition to want out and subscribe flourishing recording artists and songwriters to long-term agreements, both EMI course of records as well grow and enhanced their single(a) catalogues and artist rosters by strategic legal proceeding. twain break scholarships for EMIs recorded-music division were the 1955 acquisition of a leadership the Statesn record label, Capitol Records, and the 1992 acquisition of Virgin Music Group, hence the life-sizedst independent record label. Together the transactions added such key recording stars as Frank Sinatra, Nat King Cole, Janet Jackson, and the Rolling Stones. The music-publishing division quasi(prenominal)ly targeted existing publishing assets with large, proven commercial authorisation such as the acquire in various stages of Motown part Berry Gordys music catalog in 1997, 2003, and 2004.Since the associations macrocosm in 1897, EMIs model had been that of unendingly seeking to boom out their catalog, with the hits of to mean solar day forming the classics of tomorrow.4 Both divisions move the goal of having the top-selling artists and songwriters and the deepest, mostrecognized catalog assets. EMI welcomed technological innovations, which a lot drove change magnitude music sales as consumers updated their music collections with the latest music medium (e.g., replacement an LP or cassette with the same recording on compact disc). just the latest technology, digital phone on the net income, was different and revolutionary. digital audio frequency on the payment demanded rethinking the business model of all the majors, including EMI.Digital phone and the Music intentnessDigital audio had been around since the climax of the compact disc (CD) in the firstish 1980s, but the nineties combination of digital audio, Internet, and MP3 cross-file format brought the music industry to a new crossroads. The MP3 format had or so the same laboured quality as CDs, but its delicate file coat allowed it to be considerably downloaded from the Internet, stored on a com rateer disenfranchised drive, and transferred to a digital audio player, loosely referred to as an MP3 player. Peer-to-peer file- overlap Internet serve, most notably Napster, emerged in the late 1990s. First usable in mid-1999, Napster facilitated the tack of music files. The use of Napsters file-sharing course of study exploded, and Napster claimed 20 million users by July 2000.EMI Group PLC yearbook inform, 2007.Napsters swift developing did not go unnoticed by the music industry. composit ion the Recording sedulousness Association of America (RIAA) was eventually successful in using the court system to force Napster to pick out copyrighted material, it did not stop peer-to-peer file sharing. New services were rapidly highly-developed to replace Napster. The multinational Federation of the Phonographic fabrication (IFPI), an organization representing the recording industry worldwide, estimated that around 20 one million million million songs were downloaded illicitly in 2005.EMI was an early presence on the Internet in 1993. In 1999, EMI artist David Bowies album, hours, was the first album by a major recording artist to be released for download from the Internet. no(prenominal) of the record labels were prepared, however, for how quick peer-to-peer file sharing would change the kinetics of the music industry and stupefy a seemingly aeonian thorn in the music industrys side. In the wake of Napsters demise, the music labels, including EMI, seek various su bscription services, but most failed for such discernments as appeal, CDburning restrictions, and repugnance with available MP3 players. just in the spring of 2003, when Apple launched its user-friendly Web site, iTunes Music Store, did authentic digital-audio sales really take off in the United States, the worlds largest music market. Apple began to in flat tiree iTunes globally in 2004 and exchange its one-billionth download in February 2006.According to the IFPI, there were500 legitimate on-line music services in more than 40 countries by the beginning of 2007, with $2 billion in digital music sales in 2006. despite the rise of legally downloaded music, the global music market keep to shrink due(p) to the rapid reduce in sensible sales. Nielsen SoundScan noted that ingrained album units sold (excluding digital-track equivalents) crashd almost 25% from 2000 to 2006.5 IFPI optimistically predicted that digital sales would brood for the come down in carnal sales in 2006, til now in early 2007, IFPI admitted that this holy grail had not yet occurred, with 2006 overall music sales estimated to conduct declined by 3%.6 IFPI now hoped digital sales would drop lifeless the decline in bodily sales in 2007. character reference Suisses globular Music application Forecasts incorporated this view with a relatively flat music market in 2007 and minor gain of 1.1% to 1.5% in 2008 and 2009.7 The reliance Suisse analyst too noted that the music industrys operating circumferences were expect to rise as digital sales became more portentous and related ware and distribution be declined.8 Lehman Brothers was more conservative, take for granted a flat market for the near few years and commenting that the continue flunk in early 2007 implied that the market could remain tough for the next couple of years.9 umteen in the industry feared that consumers business leader to unbundle their music purchases to purchase two or three preferred songs from an album on-line versus the entire album at a physical sell storewould put negative blackjack on music sales for the predictable future. A extend Stearns research report noted mend music consumption, in terms of auditory sense time, is increasing as the iPod and other movable devices gain become mass-market products, the industry has pipe down not put together a trend of monetizing this consumption. Instead, ontogeny piracy and the unbundling of the album, combined with the growing power of enormous retailers in the physical and iTunes in the digital worlds, have unexpended the industry in a funk. there is no prompt solution that we are aware of on the horizon and in our view, visibility on sales system poor.10Recent Developments at EMIThe last few years had been fantastically difficult, particularly within EMIs recordedmusic division, where revenues had declined 27% from GBP 2,282 million in 2001 to GBP 1,660 million in 2006. (Exhibits 4 and 5 show EMIs financ ial statements through FY2007.) Fortunately, downloadable digital audio did not have a similar ruinous picture on the publishing division. EMIs publishing sales were a small fender for the fellowships performance and hovered in a airless range of GBP 420 million to GBP 391 million during that period. CEO Eric Nicolis channelise at the July 2006 annual general opposition indicated good subjects were in store for EMI in both the hapless term and the long term. Nicoli stressed EMIs exciting glide slope(prenominal) release schedules, issue in digital sales, and success with restructuring plans. EMIs digital sales were growing and equal an increasingly large percentage of sum core revenues. In 2004, EMI generated stem digital revenues of GBP 15 million,which represented just less than 1% of total group revenues. By 2006, EMI had cock-a-hoop the digital revenue to GBP 112 million, which represented 5.4% of total group revenues.The anticipate 2007 digital sales for EMI were close to 10% of group revenues. stipulation the positive first moments for its 2007 fiscal year, financial analysts had anticipate EMIs recorded-music division to see positive sales development during the year. EMIs confusion negative salary guidance on January 12 quickly changed its outlook. EMI disclosed that the music industry and EMIs second fractional of the year releases had underperformed its expectations. epoch the publishing division was on track to achieve its goals, EMIs recorded-music division revenues were now expected to decline 6% to 10% from one year ago. The market and investor companionship reacted swiftly to the news.With handicraft volume almost 10 measure the previous days volume, EMIs market capitalization ended up down more than 7%. EMI go on shocked the investment participation with another(prenominal) profit archetype just one month after. On February 14, the company announced that the recorded-music divisions FY2007 revenues would actually decrease by about 15% year-over-year. EMI found its new grubby think on worsening market conditions in north-central America, where SoundScan had calculated that the physical music market had declined 20% in 2007. The investment community punished EMI more severely after this second bewilderment profit warning, and EMIs store price dropped another 12%. British report The passing(a) telecommunicate reported shareholders were increasingly disgruntled with performance surprises. unrivalled shareholder allegedly said, I think Nicolis a unawares duck. EMI is now very vulnerable to a takeover bid, and Nicoli is not in any position to defend anything. I think the finance director Martin Stewart has as well as been tainted because it suggests they did not get to the stooge of the numbers. EMI analyst Redwan Ahmed of oriel Securities also decried EMI watchfulnesss recent news Its disastrous they give themselves a bragging(a) 6% to 10% range and a month later say its 15%. They have lost all credibility. I also think the dividend is passage to get gelded to about 5p.11 Exhibit 6 contains information on EMIs shareholder profile.As its fiscal year came to a close, EMIs sexual reports indicated that its February 14 indicate was close to the mark. The recorded-music divisions revenue was down, and profits were negative. The publishing-division revenue was essentially flat, and its divisions margin improved as a result of a smaller cost base. The company expected rudimentary group earnings before interest, taxes, depreciation, and amortization (EBITDA), before colossal items, to be GBP 174 million, which exceeded analysts estimates. Digital revenue had heavy(a) by 59% and would represent 10% of revenue. EMI focus be after to make a joint announcement with Apple in the next few days that it was tone ending to be the first major music company to offer its digital catalog free from digital-rights counselling and with improved hold out quality. The ne w format would sell at a 30% premium. EMI caution expected this move would drive increased digital sales.Management was satisfy with the progress of the restructuring schedule announced with the January profit warning. The plan was world implemented quicker than expected and, accordingly, more cost nest egg would be effected in FY2008. The class was dismissal to cost closer to GBP cxxv million, as opposed to the GBP 150 million previously announced. Upon completion, the chopine was expected to suppress GBP 110 million from EMIs annual cost base, with the majority of savings coming from the recorded-music division. The plan trim layers in the watchfulness structure and encourage the recorded-music and publishing divisions to work more closely together forrevenue and cost synergies.12 One headline-worthy change in the reorganization was the surprise removal of the recorded-music division head, Alain Levy, and Nicoli taking direct responsibility for the division.The Divi dend endSince the board had already declared an interim dividend of 2p per share in November 2006, the question was whether to wield the past payout direct by recommending that an surplus 6p final EMI dividend be paid. Considering EMIs assay financial situation, there was good reason to question the learning of paying a dividend. Exhibit 7 provides a forecast of the cash prevail effects of maintaining the dividend, based on market-based forecasts of 11Alistair Osborne, Nicoli a dead duck as EMI issues new warning, Daily Telegraph, February 16, 2007. Restructuring efforts over the previous three years had collectively salvage the company GBP one hundred eighty million annually however, the result was a one-time implementation cost of GBP 300 million.Omitting the dividend, however, was apt(predicate) to send a message that management had lost confidence, potentially accelerating the ongoing stock price declinethe last thing EMI needed to do.13 (Exhibit 9 depicts trends in th e EMI share price from may 2000 to May 2006.) Many believed that music industry frugals were on the verge of act the corner. A decision to maintain the historical 8p dividend would emphasize managements expectation of business feeler despite the disappointing recent financial news. Forecasts for global economic growth continued to be healthful(Exhibit 10), and reimbursements to shareholders through dividends and repurchases were on the upswing among media peers (Exhibit 11). As Stewart navigated his way home, the radio play another hit from a well-known EMI artist. Despite the current difficulties, Stewart was convinced there was still a lot going for EMI.Historically, there was bulletproof evidence of meaning(a) negative stock-price reactions to dividend cancellations (see Balasingham Balachandran, conjuring trick Cadle, and Michael Theobald, Interim Dividend Cuts and Omissions in the U.K., European fiscal Management 21 (March 1996), 2338, for a study using only British fi rms, and Roni Michaely, Richard Thaler, and Kent Womack, harm Reactions to Dividend Initiations and Omissions Overreaction of Drift? diary of Finance, 50, 2 (June 1995), 573608, for a larger study using U.S. firms. Both academics and practitioners vigorously debated the reach of dividend policy. In fact, Nobel honourable economists had argued that dividend policy should maintain little relevance to investors. Exhibit 8 contains a drumhead of Modigliani and Miller arguments.