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If the final round of an auction attracts seven competitive bids, someone is bound to pay up. Vivendi’s Universal Music Group fought off six other trade and financial buyers to win Bertelsmann’s BMG Music Publishing, but had to pay €1.63bn to clinch the deal.

The price is a hefty one, equivalent to 20 times 2005 earnings before interest, tax, depreciation and amortisation, which reflects competitive tension and Universal’s potential to extract cost savings. Universal, the world’s largest recorded music group, will achieve a similar market position in publishing with a 26 per cent share.

It is tempting to conclude that BMG’s huge price suggests rivals, such as EMI and Warner Music Group, are undervalued. Financial buyers, however, would have less scope for synergies, while consolidation among the larger operators would probably not be possible for antitrust reasons. Indeed, Universal’s purchase is subject to regulatory approval, which cannot be taken for granted in the wake of European authorities’ re-examination of the Sony-BMG recorded music merger. There would also be no strategic merit in either EMI or Warner Music Group selling their publishing businesses. A multiple based on a competitive tender would, therefore, be too high.

Universal may be able to realise annual synergies of up to €50m. Taking account of these savings, taxed and capitalised on a multiple of 10 times, reduces the BMG deal’s ebitda multiple to 15.8 times. Applying this to their publishing assets would leave EMI’s recorded music business trading at 7.3 times September 2006 ebitda and WMG’s at 9.4 times.

Neither valuation is outstandingly cheap, particularly given a weak global music market. In the US, for example, declines in first-half physical sales more than offset digital growth. Against this background, the best hope for EMI and WMG investors is a resumption of bid talks. That, however, appears some way off.

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