For Disney, EMI May Make a Tempting Target

London's EMI, the last big, independent, publicly traded music company, could offer a way for the Mouse to expand into the music business.
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Is

Disney

(DIS) - Get Report

in the market for

EMI Group

, the last big independent publicly traded music company?

Asked whether the Mouse was considering any acquisitions, Disney Chief Financial Officer Thomas Staggs highlighted music and local television stations as the two most logical places for the company to expand.

Indeed, buying a music company would fill a hole in Disney's portfolio. Music is the only major entertainment business in which Disney lacks a substantial presence, though it does have a small label,

Hollywood Records

. In addition, music sales are currently slow worldwide, giving the Mouse a chance to become a global player in the business without paying top dollar.

If Disney does choose to take that step, EMI is pretty much the only candidate for a takeover. With

Seagram's

(VO) - Get Report

purchase of

Polygram

last year, five major music companies remain. Three are part of much larger public entertainment conglomerates, while the fourth is owned by Germany's privately held

Bertlesmann

. That leaves EMI, a British company that's the third-largest seller of music worldwide, though last among the majors in the important U.S. market. (Worldwide music sales were about $40 billion last year; the U.S. accounts for roughly one-third of all sales.)

Music to Big Ears?
Share of U.S. album sales, January-June 1999

Source: Soundscan, Billboard

Note: U.S. consumers spent about $13.7 billion in 1998 on recorded music, according to the Recording Industry Association of America. More than 90% of that sum was spent on full-length CDs and cassettes, known in industry jargon as "albums," with the rest spent on singles and music videos.

EMI stock, which is traded exclusively in London, was down almost 25% from its 1998 highs when rumors that free-spending Seagram might make a bid for the company pumped the stock. Still, EMI, which has a total valuation of around $8 billion, including debt, is hardly dirt-cheap. Despite posting year-over-year declines in both earnings and cash flow for its March 1999 fiscal year, EMI trades at about 2 times sales and close to 15 times cash flow, figures roughly comparable to Disney's valuation.

So is Disney talking to EMI? An EMI spokeswoman says the company doesn't comment on rumors or speculation. And neither Staggs nor Disney head of strategic planning Peter Murphy would offer specifics beyond Staggs' initial comment about the company's potential interest in a music company. "Why would we tell you that?" Murphy said tartly when

TSC

pressed him on the issue.

Why indeed? And why mention music at all, except as a trial balloon? The Mouse may already be learning how to spin...