October 30, 2011 9:04 pm/FT

Blavatnik walks away from EMI auction

By Andrew Edgecliffe-Johnson in New York

Len Blavatnik, whose Access Industries group bought Warner Music earlier this year, has walked away from the $3bn-$4bn auction for EMI, turning Citigroup’s attempt to sell the UK music company into a tense game of brinkmanship, people close to the negotiations said.

Mr Blavatnik’s offer of about $1.5bn for EMI’s recorded music division remained below the price at which the US bank was prepared to sell the asset it seized in February from Guy Hands’ Terra Firma private equity group, these people said.

However, they did not rule out Mr Blavatnik returning to the table, as he did after a similar threat three weeks ago, adding that it may not be clear for two weeks or more whether Citigroup will settle for offers below initial hopes or retain EMI for at least another year.

These people also said Citigroup’s negotiations over EMI Music Publishing appeared to have made more progress, with an offer of about $2bn from BMG, the joint venture between Bertelsmann and Kohlberg Kravis Roberts, beating a bid from a Sony-led group which was still working to secure financing from sovereign wealth funds and elsewhere.

Mr Blavatnik, a Soviet-born US citizen with a portfolio of industrial and technology assets, has been the front-runner for EMI’s recorded music division because of the likely $350m of savings that industry executives believe can be generated by combining the two similar-sized rivals.

Universal Music, owned by Vivendi, withdrew its offer for recorded music last week, while Ronald Perelman, the billionaire investor, is said to have bid less for the division than Mr Blavatnik.

Should it fail to get Mr Blavatnik back to the negotiating table, Citigroup could retain all of EMI or just its recorded music business in the hope that financing markets improve in the next 12 to 18 months and allow it to restart the auction in a more favourable climate.

People close to several bidders believe the bank is prepared to keep EMI if it unhappy with the offers, but caution that this would risk leaving the company wary of investing and hamstrung in signing artists and songwriters or recruiting staff.

The recorded music industry has this year seen its first growth in US album sales for six years, and has found new revenues from digital streaming services led by Spotify, but analysts remain wary about its outlook.

The auction for EMI has been complicated by disagreements about valuing EMI’s pension deficit, and about the tax penalties and other costs involved in splitting its two divisions. These factors have also blurred the headline valuations on bids for the two halves of the company.

Representatives for Citigroup and the bidders all declined to comment.