Ruling could split Sony BMG

The unprecedented ruling by Europe's second-highest court annulling the European Union's approval of a 2004 merger between Sony Music and BMG could force a break-up of the world's second-biggest music company.

The ruling yesterday by the European Court of First Instance, upholding a challenge to the deal from independent record labels, also cast doubt on the viability of combining EMI Group and Warner Music, which are engaged in a duel to buy each other.

Warner's shares tumbled 15.2 per cent to US$25.24 on the New York Stock Exchange, and EMI's closed down 9.2 per cent at 277.75p in London.

The European Commission said it would have to re-examine the union of Sony and BMG, a 50-50 joint venture between Japanese electronics giant Sony and German media group Bertelsmann.

It can also appeal against the ruling.

The decision means Sony Music and BMG, home to such artists as Bruce Springsteen and Kelly Clarkson, have seven days to submit the merger plan anew to the EC, which also would have to consider new industry conditions, including the rapidly growing market for online and mobile phone downloads.

The commission would then have a month to decide whether to approve it, consider remedies or open a four-month in-depth probe, which could lead to a rejection of the deal.

"If we were to give a red light, then the joint venture would have to be reversed," commission spokesman Jonathan Todd said.

Sony and Bertelsmann said they would review the ruling.

Overturning an EU-approved merger for the first time, the court said too cursory an examination was conducted into whether there was already collective market dominance in the music industry, and whether that dominance might grow following the Sony BMG deal.

EMI and Warner, the world's third-and fourth-largest music companies, respectively, have each offered about US$4.6 billion ($7.45 billion) to buy the other, with both bids rejected.

Warner has offered 320p a share for EMI, and EMI US$31 for each of Warner's shares.

Two people close to the deal, who asked not to be named, said talks between the companies were likely to be suspended because of the ruling.

Numis analysts slashed their EMI price target by 19 per cent to 260p from 320p following news of the ruling.

The case against the creation of Sony BMG was brought by Impala, the umbrella trade group for 2500 independent labels, which claimed that reducing the industry from five major players to four put too much market power in too few hands.

"The EC had the courage to scrutinise and correct its mistakes," said Hein van der Ree, Impala's vice president and the managing director of Epitaph Europe.

"This locks the door for an EMI/Warner merger, thankfully," he added, "and keeps the doors of market access open for the little guy."

- REUTERS