Bloomberg

Feb. 14 (Bloomberg) — EMI Group Plc, the U.K. record
company that signed the Beatles, cut its revenue and profit
forecasts for the second time this year as music sales slump in
the U.S.

EMI shares had the biggest slide in two years after the
company said full-year sales at its recorded music division will
fall 15 percent and earnings will miss analysts’ estimates.
London-based EMI last month predicted a 10 percent sales drop.

The company, which released albums by Robbie Williams and
Norah Jones in the second half, today reported an
“unprecedented level of market decline” and “an exceptionally
high level of product returns.” EMI ousted its top two music
executives on Jan. 12 after disappointing holiday sales. EMI has
failed to produce best-selling U.S. albums and lost revenue to
piracy.

“EMI has got an awful lot of work to do in terms of
securing its future,” said Henk Potts, an equity strategist at
Barclays Wealth. “EMI has specific problems related to its
company. The artists on its books look as though they are
underperforming.”

The shares fell 28.75 pence, or 12 percent, to 210.75 pence
in London, giving the company a market value of 1.69 billion
pounds ($3.3 billion). It was the biggest drop since Feb. 7,
2005, driving the stock to the lowest since Oct. 27, 2005.

Shares of New York-based Warner Music Group Corp. fell
$1.27, or 6.6 percent, to $18.12 at 4:01 p.m. in New York Stock
Exchange composite trading. They’ve fallen 11 percent in the
past year.

`Deterioration’

“This revision to expectations is as a result of the
continued and accelerating deterioration in market conditions in
North America,” EMI said today in a statement. Profit for the
year ending March 31 “will be significantly below current
market expectations.”

The North American market for compact discs has contracted
20 percent this year, EMI said, citing Nielsen Soundscan
figures.

“They have always had a problem in the U.S. in terms of
generating artists’ sales,” said Alex Degroote, an analyst at
Panmure Gordon. “This Christmas period the release schedule
hasn’t worked for them at all.”

EMI, the world’s third-biggest music company, said it will
give a performance update on April 18 and report full-year
results on May 23.

Credit-Default Swaps

Credit-default swap contracts based on EMI debt rose about
9,500 euros to 181,000 euros, according to prices compiled by
Bloomberg. The price is the annual cost in a five-year contract
based on 10 million euros of EMI bonds and loans. Credit-default
swaps are used to speculate on a company’s ability to repay
debt. An increase indicates a deterioration in credit quality.

EMI has about 990 million pounds of bonds outstanding,
according to Bloomberg data.

“There’s very high financial risk associated with this
company,” Panmure Gordon’s Degroote said. “I would be very
surprised if the dividend isn’t cut totally.”

EMI ousted Alain Levy, CEO of the recorded music division,
and David Munns, the unit’s vice chairman last month. Eric
Nicoli, then chairman, was named chief executive officer. EMI
also announced a restructuring in January and said the one-time
expense of the cost-cutting program will be as much as 150
million pounds.

Merger Attempts

Slumping sales have led Nicoli, 56, to several attempts to
combine with Warner Music Group, the world’s fourth-largest
music company, as a way to reduce costs.

In July, EMI and Warner abandoned $4.6 billion bids for
each other after a European Union ruling damped prospects for
regulatory approval.

In December, EMI ended talks to be acquired by buyout firm
Permira Advisers LLP, after failing to agree on a price.

The music company has been counting on releases by Norah
Jones, Robbie Williams, Keith Urban and the Beatles to boost
sales in the second half. EMI had none of the 10 best-selling
albums in the U.S. last year, according to Nielsen SoundScan.

Vivendi SA’s Universal Music Group led all music companies
in U.S. album market share last year at 32 percent. It is the
world’s biggest music company.

Sony BMG Music Entertainment was second at 27 percent.
Warner Music was the only company with an increase, up 1 point
to 18 percent. EMI was fourth in the U.S. with 10.2 percent.
Sony BMG is a joint venture of Sony Corp. and Bertelsmann AG.

EMI’s recorded music unit’s artists didn’t win any of the
top 12 Grammy awards that were broadcast this week. Of the
categories shown on television, Sony BMG won the most awards
with five. Universal Music Group won four and Warner took one
for the Red Hot Chili Peppers’ “Stadium Arcadium.”

EMI has two divisions: EMI Music, the recorded music unit,
and EMI Music Publishing, which manages song copyrights. EMI
reiterated today that the publishing unit “continues to perform
in line with expectations.”

Loss

EMI reported a first-half loss of 30.6 million pounds in
November, saying sales fell 6.1 percent because this year’s
release schedule is weighted to the second half more than usual.

As part of its restructuring EMI combined its U.S. Capitol
and Virgin labels last month to create Capitol Music Group.
Jason Flom, head of Virgin Records in the U.S., was named to run
the new group. On Jan. 31 the company named Lee Trink president
of Capitol Music and Jeff Kempler chief operating officer,
reporting to Flom. Both were executive vice presidents at
Virgin.

EMI traces its history to the earliest days of recorded
music, and became known as Electric and Musical Industries in
1931. During the 1950s EMI released Elvis Presley’s first
records outside the U.S. and bought Capitol Records, gaining
Frank Sinatra, Nat “King” Cole and Peggy Lee.