Thorn EMI’s new beat has so far failed to get British feet tapping

George Pitcher is joint managing director of media consultancy Luther Pendragon

I promised some thoughts on the Thorn EMI demerger once the excitement had died down. In the event, the excitement – such as it was – died down fairly quickly.

I think there’s room for some reflection. For one thing, the automatic assumption has been that a bid will be made for music division EMI almost as soon as it becomes a discrete entity, probably by an American cross-media giant like Disney. That’s as may be but it is interesting to note that Thorn EMI’s share price has softened since the demerger announcement – not usually a signal that the City is anticipating an imminent bid.

The problem here, I believe, is that British markets are slow to appreciate shifts in corporate fashion. In particular, the markets have been sluggish in grasping the growing values of the British music industry. As I say, it is time to reflect on these matters.

And what is more reflective than looking at the things some of the more enlightened parts of the City were saying five years ago?

I have a yellowing document from that period from County NatWest WoodMac (Ah, where is it now?), which boasted at the time one of the strongest leisure teams in the City.

This strategic assessment from July 1991, headed “Sweet music for the Nineties”, had the following to say: “While political and economic worries persist, the Thorn share price should be underpinned by three factors: financial strength…a business mix that can withstand lengthy recession but offer recovery prospects; and beneficial moves in exchange rates. Yet a substantial re-rating is likely over the next two years as continuing margin improvement in the music division…take it to be not only the largest of Thorn’s businesses but the most valuable. The impact of the new management approach to that division has yet to be appreciated by the market.”

Thorn’s share price in those recessionary days had sloshed around the 650p mark, before recovering to a little over 700p at the time of County NatWest’s analysis.

Since then, City analysts have taken stock of that “new management approach” by indulging in a frenetic round of leap-frog forecasts and Thorn’s share price has been pushed through 12, then through 14 and right up past 17 to a record of 17.26p, capitalising the concern at over 7bn and putting the shares on a price/earnings multiple fast approaching 30.

EMI Music’s chief executive Jim Fifield can take much of the credit for the runaway revaluations of Thorn EMI by the City. And, yes, Fifield was part of a “new management approach”, not just on the part of Thorn EMI, but as part of a trend that developed within the British music industry towards bringing in senior managers from alien corporate backgrounds.

In the case of Fifield, it was a manager from an alien but symbiotic background. He had just spent three years as ceo of CBS/Fox Video – and we now know what the future working relationships will be between music and distribution, from movies to cable channels.

That might help to explain Thorn EMI’s galloping share price. What is harder to understand is why it should have fallen back, since the demerger announcement, to about 16.24p.

Part of the answer could be that the booming music business is perceived to be close to maximum margin. It is consequently difficult to imagine how the business could be lifted from its current position. Alternatively, doubt could be creeping into the minds of those who believed that EMI was an obvious takeover target.

It is hard to ascribe much credibility to either view. Margin improvements have yet to be properly tested by the synergies of new media such as cable and CD-Rom. Equally – among those mooted as potential purchasers of EMI – including Disney, Rupert Murdoch and Seagram, which would dearly love a music business to go with its MCA acquisition – it is difficult to believe that not one recognises the development value of EMI.

No, the problem here must be a continued reluctance to recognise the inherent value of the British music industry, as distinct from a particular recovery stock such as Thorn EMI.

At the start of the decade, the City looked at the likes of Chrysalis and Virgin and saw a mess. It now looks as though Richard Branson sold Virgin to EMI for a song. Not that the City seems to have woken up to this – the British attitude remains, five years old.

The upshot of this is that EMI will probably be bought by American interests, and the last major British music company pass into foreign ownership.

It is a shame that neither the quality of the industry’s product – witness British successes in the Grammies and the American charts – nor its management, is recognised domestically.

More worrying still is the City’s inertia. Five years ago, Thorn EMI was deeply unfashionable. Look at it now.

In contrast, today’s unfashionable stocks are undoubtedly ones in construction and property. Who knows, particularly under a Labour government, where they could be in five years?v

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