EMI sees bright future on its own

Investment: Economic downturn hits volatile music industry, but travel sector stays strong

EMI, the UK music company that has been the centre of frenzied takeover speculation this week, yesterday insisted that it is not for sale and has a bright future as an independent group.

"We are H-O-T, hot," Sir Colin Southgate, the group's chairman said. "We are the third biggest music group in the world and rank either number one or two in most of our markets. Of course we can go it alone."

EMI, whose roster of artists includes The Spice Girls and the Smashing Pumpkins, has been linked with Rupert Murdoch's News Corporation and German music group, Bertelsmann. However, all of the companies have denied that a deal is on the cards.

But as EMI reported an 11 per cent slide in half-year profits to pounds 68.6m, excluding the contribution from the HMV retail division that has been sold, the group said it is looking to expand beyond the music business. It wants to take advantage of its global distribution network and utilise its skills in managing the creative process.

Sir Colin said other "product", such as films, could be pushed through EMI's distribution network, hence EMI's interest in acquiring Polygram Filmed Entertainment from Seagram earlier this year. "Product like film is also label-driven, with back catalogue and a risk element that we know how to manage. We believe it is our responsibility to make better use of our global distribution system."

Sir Colin also confirmed that EMI is in talks that could lead to a distribution joint venture in Asia and said it would hold discussions with other rivals about possible link-ups. The search for a chief executive is continuing and an announcement could be made in the first quarter of next year.

Shares in EMI have halved since it spun off its Thorn rentals business two years ago. The stock has been hit by a series of profit downgrades and weakening takeover hopes. An offer of around 620p per share from Seagram was spurned and the US group acquired PolyGram instead.

EMI's problem is that there has been no overall growth outside of America, and markets in the Far East and Latin America have been badly affected by economic turmoil. Although EMI has increased its market share in the US its global share has declined.

Another problem is the increasingly volatile nature of the music market with top bands shooting to early prominence but then fading quickly before they have built up a valuable back catalogue of recorded music.

EMI hopes to counter this by getting closer to local markets and by shortening recording contracts and paying smaller up-front sums. It is also adding more local acts to markets such as urban music in America and other local specialisms in Japan and France. But the volatility of record sales is harmful for earnings.

EMI has recently enjoyed successes with albums by The Verve, Robbie Williams and the sound track from the film Titanic. But the waning popularity of the Spice Girls and a poor return from investment in The Smashing Pumpkins is symptomatic of the hit and miss nature of the business.

With EMI's shares falling 4.5p to 360.5p and margins set to fall further in the second half, analysts are sceptical about prospects.

Neil Blackley of Merrill Lynch said: "We don't believe that there is any takeover potential. Bertelsmann says it is not interested and all the other majors would run into competition problems. They are the only ones that could pay a premium as they would be able to achieve synergies."