A European court annulled the European Union's approval of a 2004 merger between Sony Music and BMG in a surprise decision that could force a break-up of the world's second-biggest music company.
The unprecedented ruling by the European Court of First Instance yesterday, upholding a challenge to the deal from independent record labels, also cast doubt on the viability of combining EMI Group and Warner Music, which are engaged in a duel to buy each other.
Warner's shares tumbled 15.2 per cent to $25.24 (€19.88) on the New York Stock Exchange while EMI's closed down 9.2 per cent at 277 3/4 pence in London.
The European Commission said it would have to re-examine the union of Sony and BMG, a 50-50 joint venture between Japanese electronics giant Sony and German media group Bertelsmann AG. It can also appeal against the ruling.
The decision means Sony Music and BMG, home to such artists as Bruce Springsteen and Kelly Clarkson, have seven days to submit the merger plan anew to the EC, which also would have to consider new industry conditions, including the rapidly growing market for online and mobile phone downloads.
The commission would then have a month to decide whether to approve it, consider remedies or open a four-month in-depth probe, which could lead to a rejection of the deal.
"If we were to give a red light, then the joint venture would have to be reversed," commission spokesman Jonathan Todd said during a briefing with reporters.
Sony and Bertelsmann said they would review the ruling.
Europe's second-highest court, overturning an EU-approved merger for the first time, said too cursory an examination was conducted into whether there was already collective market dominance in the music industry and whether that dominance might grow following the Sony BMG deal.
EMI and Warner, the world's third and fourth-largest music companies, respectively, have each offered about $4.6 billion to buy the other, with both bids rejected.
Warner has offered 320 pence a share for EMI, and EMI $31 for each of Warner's shares.
Sources close to the deal said that talks between the two companies were likely to be suspended because of the ruling.
"It seems to pile on regulatory risk for EMI and Warner, especially at a time when there was an increasing number of people that would have been backing the inevitability of this deal," Credit Suisse analyst Simon Baker said.
Numis analysts slashed their EMI price target by 19 per cent to 260 pence from 320 pence following news of the ruling.
The case against the creation of Sony BMG was brought by Impala, the umbrella trade group for 2,500 independent labels, which claimed that reducing the industry from five major players to four put too much market power in too few hands.
The EU approved the deal, believing there was no monopoly among industry goliaths because of a lack of public fighting among them and the diversity of music available to consumers.
"The elements on which that argument was founded were incomplete and did not include all the relevant data that ought to have been taken into account by the commission," the court said.
"They were therefore not capable of supporting the conclusions drawn from them." A third source close to the deal said the ruling may not be as bad a setback as it looks, and the EU could still clear the Sony BMG deal as well as pave the way for EMI and Warner.
