EMI Group PLC

In this Internet age, the consumer is using music content more than ever before-whether that's
playlisting, podcasting, personalizing, sharing, downloading or just simply enjoying it. The dig-
ital revolution has caused a complete change to the culture, operations, and attitude ofmusic
companies everywhere. It hasn't been easy, and we must certainly continue to fight piracy in all
its forms. But there can be no doubt that with even greater commitment to innovation and a true
focus on the consumer, digital distribution is becoming the best thing that ever happened to the
music business and the music fan.
-Eric Nicoli, CEO, EMI Groupl

In early spring of 2007, Martin Stewart drove through the darkened streets of Kensington
in West London. As chief financial officer (CFO) for global music giant EMI, Stewart
already knew most of the news that would break at the company's April 18 earnings
announcement. Annual underlying revenue for the company was down 16% to GBP
1.8 billion (British pounds). Earnings per share (EPS) had also dropped from 10.9 pence
(p) in 2006 to -36.3p in FY2007 (fiscal year). Those disappointing numbers were
roughly in line with the guidance Stewart had given investors in February. The perfor-
mance reflected the global decline in music industry revenues, as well as the extraordi-
nary cost of the restructuring program EMI was pursuing to realign its investment
priorities and focus its resources to achieve the best returns in the future.
The earnings announcement would include an announcement of the dividend amount,
which had not yet been determined. The board would meet soon to review EM!' s annual
results, and Stewart was to recommend an appropriate final dividend for the fiscal year. 2

This case was written by Elizabeth W. Shumadine (MBA '01), under the supervision of Professor Michael J.
Schill, based on public information. Funding was provided by the L. White Matthews Fund for Finance case
writing. Copyright © 2008 1:>Y the University of Virginia Darden School Foundation, Charlottesville, VA.
All rights reserved. To order copies, send an e-mail tosales@dardenbusinesspublishing.com. No part ofthis
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form
or by any means-electronic, mechanical, photocopying, recording, or otherwise-without the permission of
the Darden School Foundation. Rev. 2/09.
lIntemational Federation of Phonographic Industry (lFPI), "IFPI: 07 Digital Music Report," January 2007.
2In the United Kingdom, companies typically declared dividends twice a year, frrst with the midyear results and
second with the full-year results. Typically, EMI paid an interim dividend of 2p per share and a final dividend
of 6p per share. In addition, both EMI's interim and final dividends were paid out to shareholders in the follow-
ing fiscal year. In November 2006, EMI's board committed to paying the interim dividend of 2p per share
following its 2007 fiscal midyear results with actual payment to shareholders expected in April 2007. Both the
2p interim dividend and the recommended final dividend would be reflected in the 2008 financial statements.

329
330 Part Five Management of the Firm's Equity: Dividends and Repurchases

On an annual basis, EMI had consistently paid an 8p-per-share ·dividend to ordinary

shareholders since 2002 (Exhibit 27.1). Now in light of EMI's recent performance,
Stewart questioned whether EMI should continue to maintain what would represent a
combined GBP 63-million annual dividend payment. Although omitting the dividend
would preserve cash, Stewart appreciated the negative effect the decision might have on
EMI's share price, which was currently at 227p. Stewart recognized that EM! faced
considerable threat of a takeover. Although its board had recently been able to success-
fully reject an unsolicited 260p-per-share merger offer from U.S. rival Warner Music,
there remained considerable outside interest in taking over EMI. It seemed that boosting
EMI's share price was imperative if EMI was to maintain its independence.

EMI
With a storied history that included such names as the Beatles, the Beach Boys, Pink.
Floyd, and Duran Duran, it was not difficult to understand why EMI considered its cur-
rent and historical catalog of songs and recordings among the best in the world. EMI,
Warner Music Group, Sony BMG Music Entertainment, and Universal Music Group,
collectively known as "the majors," dominated the music industry in the early 21st cen-
tury and accounted for more than two-thirds of the world's recorded music and publish-
ing sales. 3 Exhibit 27.2 contains a list of the global top-10 albums with their respective
record labels for the last four years.
Recorded music and music publishing were the two main revenue drivers for the
music industry. EMI divided its organization into two corresponding divisions. EMI
Music, the recorded-music side, sought out artists it believed would be long-term com-
mercial recording successes. Each EMI record label marketed its artist's recordings to
the public and sold the releases through a variety of retail outlets. EMI's extensive mu-
sic catalog consisted of more than 3 million songs. Recorded-music division sales came
from both new and old recordings with existing catalog albums constituting 30% to 35%
of the division's ,unit sales. Exhibit 27.3 contains a list of EMI' s most successful recording
artists in FY2007.
EMI Music Publishing focused not on recordings but on the songs themselves.
Generally, there were three categories of publishing-rights ownership in the music in-
dustry: the lyric's author, the music's composer, and the publisher who acquired the
right to exploit the song. These publishing-rights owners were entitled to royalties
whenever and however their music was used. Music publishers categorized their reve-
nue streams as mechanical royalties (sales of recorded music), performance royalties
(performances of a song on TV, radio, at a live concert, or in other public venues such
as bars), and synchronization royalties (use of a song in audiovisual works such as ad-
vertisements or computer games). EMI included a fourth category of royalties labeled
"other," which included sales of sheet music and, increasingly, mobile ring tones and ring
backs. Similar to the recorded-music division, the music-publishing division identified

3William B. Drewry, Jolanta Masojada, Nick Bertolotti, and Giasone Salati, "Global Music Industry, 'Just
the Two of Us,'" Credit Suisse Equity Research, June 16,2006. Sony BMGMusic Entertainment was a joint
venture owned by Sony Corporation and Bertelsmann. Universal Music was owned by Vivendi.
 Case 27EMI Group PLC 331

songwriters with commercial potential and signed them to long-term contracts. The di-
vision then assisted the songwriters in marketing their works to record companies and
other media fmns. EMI's current publishing catalog encompassed more than 1 million
musical.compositions. Exhibit 27.3 includes a list of EMI's most-successful songwrit-
ers in FY2007. EMI's publishing·business generated one-fourth of the total group rev-
enue.Revenue in the publishing business was stable, and operating profits were positive.
In addition to seeking out and signing flourishing recording artists and songwriters
to long-term agreements, both EMI divisions also expanded and enhanced their indi-
vidual catalogs and artist rosters by strategic transactions. Two key acquisitions for
EMI's recorded-music division were the 1955 acquisition of a leading American record
label, Capitol Records, and the 1992 acquisition of Virgin Music Group, then the largest
independent record label. Together the transactions added such key recording stars as
Frank Sinatra, Nat King Cole, Janet Jackson, and the Rolling Stones. The music-
publishing division similarly targeted existing publishing assets with large, proven
commercial potential such as the purchase in various stages of Motown founder Berry
Gordy's music catalog in 1997,2003, and 2004.
Since the company's founding in 1897, EMI's model had been that of "constantly
seeking to expand their catalog, with the hits of today forming the classics of tomor-
row.,,4 Both divisions pursued the goal of having the top-selling· artists and songwriters
and the deepest, most-recognized catalog assets. EMI welcomed technological innova-
tions, which often drove increased music sales as consumers updated their music collec-
tions with the latest music medium (e.g.,replacing an LP or cassette with the same
recording on compact disc). But the latest technology, digital audio on the Internet,was
different and revolutionary. Digital audio on the Internet demanded rethinking the
business model of all the majors, including EMI.

Digital Audio and the Music Industry

Digital audio had been around since the advent of the compact disc (CD) in the early
1980s, but the 1990s combination of digital audio, Internet, and MP3 file format brought
the music industry to a new crossroads. The MP3 format had nearly the same sound
quality as CDs, but its small file size allowed it to be easily downloaded from the Inter-
net, stored on a computer hard drive, and transferred to a digital audio player, generally
referred to as an MP3 player.
Peer-to-peer file-sharing Internet services, most notably Napster, emerged in the
late 1990s. First available in mid-1999, Napster facilitated the exchange of music files.
The use of Napster's file-sharing program exploded, and Napster claimed 20 million
users by July 2000. Napster's swift growth did not go unnoticed by the music industry.
While the Recording Industry Association of America (RIAA) was eventually success-
ful in using the.court system to force Napster to remove copyrighted material, it did
not stop peer-to-peer file sharing. New services were quickly developed to replace
Napster. The International Federation of the Phonographic Industry (IFPI), an organization

4EMI Group PLC annual report, 2007.

332 Part Five Management of the Firm's Equity: Dividends and Repurchases

representing the recording industry worldwide, estimated that almost 20 billion songs
were downloaded illegally in 2005.
EMI was an early presence on the Internet in 1993. In 1999, EMI artist David
Bowie's album, hours . .. , was the frrst album by a major recording artist to be released
for download from the Internet. None of the record labels were prepared, however, for
how quickly peer-to-peer file sharing would change the dynamics of the music industry
and become a seemingly permanent thorn in the music industry's side. In the wake of
Napster's demise, the music labels, including EMI, attempted various subscription ser-
vices, but most failed for such reasons as cost, CD-burning restrictions, and incompat-
ibility with available MP3 players. Only in the spring of 2003, when Apple launched its
user-friendly Web site, iTunes Music Store, did legitimate digital-audio sales really take
off in the United States, the world's largest music market. Apple began to expand
iTunes globally in 2004 ,and sold its one-billionth download in February 2006. Accord-
ing to the IFPI, there were 500 legitimate on-line music services in more than 40 coun-
tries by the beginning of 2007, with $2 billion in digital music sales in 2006.
Despite the rise of legally downloaded music, the global music market continued to
shrink due to the rapid decline in physical sales. Nielsen SoundScan noted that total
album units sold (excluding digital-track equivalents) declined almost 25% from 2000
to 2006. 5 IFPI optimistically predicted that digital sales would compensate for the de-
crease in physical sales in 2006, yet in early 2007, IFPI admitted that this "holy grail"
had not yet occurred, with 2006 overall music sales estimated to have declined by 3%.6
IFPI now hoped digital sales would overtake the decline in physical sales in 2007.
Credit Suisse's Global Music Industry Forecasts incorporated this view with a relatively
flat music market in 2007 and minor growth of 1.1% to 1.5% in 2008 and 2009. 7 The
Credit Suisse analyst also noted that the music industry's operating margins were ex-
pected to rise as digital sales became more significant and related production and distri-
bution costs declined. 8 Lehman Brothers was more conservative, assuming a flat market
for the next few years and commenting that the continued weakness in early 2007 im-
plied that the "market could remain tough for the next couple of years.,,9
Many in the industry feared that consumers' ability to unbundle their music
purchases-to purchase two or three favorite songs from an album on-line versus the
entire album at a physical retail store-would put negative pressure on music sales for
the foreseeable future. A Bear Steams research report noted:
While music consumption, in terms of listening time, is increasing as the iPod and other
portable devices have become mass-market products, the industry has still not found a
way of monetizing this consumption. Instead, growing piracy and the unbundling of the

5Brian Hiatt and Evan Serpick, "The Record Industry's Decline," RollingStones.com, June 19,2007.
6International Federation of Phonographic Industry (IFPI), "IFPI: 07 Digital Music Report," January 2007.
7William B. Drewry, Jolanta Masojada, Dennis Sabo, and Ashish Gupta, "Warner Music Group," Credit
Suisse Equity Research, February 9, 2007.
8Drewry, Masojada, Bertolotti, and Salati, "Global Music Industry, 'Just the Two of Us.'"
9Richard Jones and Tamsin Garrity, "EMI Group," Lehman Brothers Equity Research, February 15,2007.
 Case 27 EMI Group PLC 333

album, combined with the growing power of big retailers in the physi,cal and iTunes in the
digital worlds, have left the industry in a funIc There is no immediate solution that we are
aware of on the horizon and in our view, visibility on sales remains poor. lO

Recent Developments at EMI

The last few years had been incredibly difficult, particularly within EMI's recorded-
music division, where revenues had declined 27% from GBP 2,282 million in 2001 to
GBP 1,660 million in 2006. (Exhibits 27.4 and 27.5 show EMI's financial statements
through FY2007.) Fortunately, downloadable digital audio did not have a similar ruin-
ous effect on the publishing division. EMI's publishing sales were a small buffer for
the company's performance and hovered in a tight range of GBP 420 million to GBP
391 million during that period. CEO Eric Nicoli's address at the July 2006 annual gen-
eral meeting indicated good things were in store for EMI in both the short term and the
long term. Nicoli stressed EMI's exciting upcoming release schedules, growth in digital
sales, and success with restructuring plans.
EMI's digital sales were growing and represented an increasingly large percentage
of total revenues. In 2004, EMI generated group digital revenues of GBP 15 million,
which represented just less than 1% of total group revenues. By 2006, EMI had grown
the digital revenue to GBP 112 million, which represented 5.4% of total group revenues.
The expected 2007 digital sales for EMI were close to 10% of group revenues.
Given the positive expectations for its 2007 fiscal year, financial analysts had ex-
pected EMI's recorded-music division to see positive sales growth during the year.
EMI's surprising negative earnings guidance on January 12 quickly changed its out-
look. EMI disclosed that the music industry and EMI's second half of the year releases
had underperformed its expectations. While the publishing division was on track to
achieve its goals, EMI's recorded-music division revenues were now expected to de-
cline 6%·to 10% from one year ago. The market and investor community reacted swiftly
to the news. With trading volume nearly 10 times the previous day's volume, EMI's
market capitalization ended up down more than 7%.
EMI further shocked the investment community with another profit warning just one
month later. On February 14,the company announced that the recorded-music division's
FY2007 revenues would actually decrease by about 15% year-over-year. EM! based its
new dismal forecast on worsening market conditions in North America, where SoundScan
had calculated that the physical music market had declined 20% in 2007. The investment
community punished EMI more severely after this second surprise profit warning, and
EMI's stock price dropped another 12%. British newspaper The Daily Telegraph reported
shareholders were increasingly disgruntled with performance surprises. One shareholder
allegedly said, "I think [Nicoli]' s a dead duck. [EMI] is now very vulnerable to a [takeover]
bid, and Nicoli is not in any position to defend anything. I think the finance director [Martin
Stewart] has also been tainted because it suggests they did not get to the bottom of the
numbers." EMI analyst Redwan Ahmed of Oriel Securities also decried EMI manage-
ment's recent news: "It's disastrous ... they give themselves a big 6% to 10% range and a

l<Nicholas Bell and Richard Gordon, CFA, "EMI," Bear Stearns International Limited European Equity
Research, February 27, 2007.
334 Part Five Management of the Firm's Equity: Dividends and Repurchases

month later say it's 15%. They have lost all credibility. I also think. the dividend is going to
get slashed to about 5p. ,,11 Exhibit 27.6 contains information on EM!' s shareholder profile.
As its fiscal year came to a close, EMI's internal reports indicated that 'its February 14
forecast was close to the mark. The recorded-music division's revenue was down, and
profits were negative. The publishing-division revenue was essentially flat, and its divi-
sion's margin improved as a result of a smaller cost base. The company expected underly-
ing group earnings before interest, taxes, depreciation, and amortization (EBITDA),
before exceptional items, to be GBP 174 million, which exceeded analysts' estimates.
Digital revenue had grown by 59% and would represent 10% of revenue. EM! manage-
ment planned to make a joint announcement with Apple in the next few days that it was
going to be the fIrst major music company to offer its digital catalog free from digital-
rights management and with improved sound quality. The new format would sell at a 30%
premium. EM! management expected this move would drive increased digital sales.
Management was pleased with the progress of the restructuring progr~ announced
with the January profit warning. The plan was being implemented quicker than expected
and, accordingly, more cost savings would be realized in FY2008. The program was going
to cost closer to GBP 125 million, as opposed to the GBP 150 million previously announced.
Upon completion, the program was expected to remove GBP 110 million from EM!' s an-
nual cost base, with the majority of savings coming from the recorded-music division. The
plan reduced layers in the management structure and encouraged the recorded-music and
publishing divisions to work more closely together for revenue and cost synergies. I2 One
headline-worthy change in the reorganization was the surprise removal of the recorded-
music division head, Alain Levy, and Nicoli taking direct responsibility for the division.

The Dividend Decision

Since the board had already declared an interim dividend of 2p per share in November
2006, the question was whether to maintain the past payout level by recommending that
an additional 6p final EMI dividend be paid. Considering EMI's struggling financial
situation, there was good reason to question the wisdom of paying a dividend. Exhibit 27.7
provides a forecast of the cash flow effects of maintaining the dividend, based on market-
based forecasts of performance. Omitting the dividend, however, was likely to send a
message that management had lost confidence, potentially accelerating the ongoing
stock price decline-the last thing EMI needed to dO. I3 (Exhibit 27.9 depicts trends in
the EMI share price from May 2000 to May 2006.)

llAlistair Osborne, "Nicoli 'a dead duck' as EMI issues new warning," Daily Telegraph, February 16,2007.
12Restructuring efforts over the previous three years had collectively saved the company GBP 180 million
annually; however, the result was a one-time implementation cost of GBP 300 million.
13Historically, there was strong evidence of significant negative stock-price reactions to dividend cancella-
tions (see Balasingham Balachandran, John Cadle, and Michael Theobald, "Interim Dividend Cuts and
Omissions in the U.K.," European Financial Management 2:1 (March 1996),23....38, for a study using only
British firms, and Roni Michaely, Richard Thaler, and Kent Womack, "Price Reactions to Dividend Initia-
tions and Omissions: Overreaction of Drift?" Journal ofFinance, 50, 2 (June 1995), 573--608, for a larger
study using U.S. firms. Both academics and practitioners vigorously debated the impact of dividend policy.
In fact, Nobel laureate economists had argued that dividend policy should maintain little relevance to inves-
tors. Exhibit 27.8 contains a summary of Modigliani and Miller arguments.
 Case 27 EMI Group PLC 335

Many believed that music industry economics were on the verge of turning the
comer. A decision to maintain the historical 8p dividend would ~mphasize manage-
ment's expectation of business improvement despite the disappointing recent financial
news. Forecasts for global economic growth continued to be strong (Exhibit 27.10),
and reimbursements to shareholders through dividends and repurchases were on the
upswing among media peers (Exhibit 27.11).
As Stewart navigated his way home, the radio played another hit from a well-
known EMI artist. Despite the current difficulties, Stewart was convinced there was still
a lot going for EMI.
(,H
(,H
="

EXHIBIT 27.1 I Financial and Stock Data per Share (in pence)

2002 (25.5) 11.8 8.0 505.00 782.8

2004 (9.1) 15.5 8.0 278.25 784.4

786.8

1Stock price data is for the fiscal year period. For example, 2007 data is from April 1,2006 to March 31,2007. Stock price data was available for 2001 only from May 15,
2000 to March 31, 2001.
Sources of data: Company Web site and Yahoo! Finance.
 Case 27 EMI Group PLC 337

EXHIBIT 27.2 I Top-10 Albums for 2003 to 2006 (physical sales only)

2006 1 Soundtrack High School Musical Walt Disney/UniversallEMI

2 Red Hot Chili Peppers Stadium Arcadium Warner
3 The Beatles Love EMI
4 James Blunt Back to Bedlam Warner
5 Justin Timberlake FutureSexiLoveSounds SonyBMG
6 Beyonce B'Day SonyBMG
7 U2 U2 18 Singles Universal
8 Rascal Flatts Me and My Gang Lyric StreetiHollywood/Universal/EMI
911 Divo Amore Universal
10 Andrea Bocelli Amore Universal

2005 1 Coldplay X&Y EMI

2 Mariah Carey The Emancipation Of Mimi Universal
3 50 Cent The Massacre Universal
4 Black Eyed Peas Monkey Business Universal
5 Green Day American Idiot Warner
6 Madonna Confessions on a Dance Floor Warner
7 Kelly Clarkson Breakaway SonyBMG
8 Eminem Curtain Call Universal
9 James Blunt Back to Bedlam Warner
10 Robbie Williams Intensive Care EMI

2004 1 Usher Confessions SonyBMG

2 Norah Jones Feels Like Home EMI
3 Eminem Encore Universal
4 U2 How To Dismantle An Atomic Bomb Universal
5 Avril Lavigne Under My Skin SonyBMG
6 Robbie Williams Greatest Hits EMI
7 Shania Twain Greatest Hits Universal
8 Destiny's Child Destiny Fulfilled SonyBMG
9 Guns N' Roses Greatest Hits Universal
10 Maroon 5 Songs About Jane SonyBMG

2003 1 Norah Jones Come Away With Me EMI

250 Cent Get Rich Or Die Tryin' Universal
3 Linkin Park Meteora Warner
4 Dido Life For Rent BMG
5 Beyonce Knowles Dangerously in Love Sony
6 Coldplay A Rush of Blood to the Head EMI
7 Evanescence Fallen Sony
8 Britney Spears In The Zone BMG
9 Avril Lavigne Let Go BMG
10 Celine Dion One Heart Sony

Source of data: International Federation of Phonographic Industry (IFPI) Web site.

338 Part Five Management of the Firm's Equity: Dividends and Repurchases

EXHIBIT 27.3 I EMI Top Recording and Publishing Successes in Fiscal Year 2007

The Beatles Love 5.0

Norah Jones Not Too Late 4.2
Corinne Bailey Rae Corinne Bailey Rae 2.7
Robbie Williams Rudebox 2.5
Keith Urban Love, Pain & The Whole Crazy Thing 2.0
Lily Allen Alright, Still 1.7
The Kooks Inside In/Inside Out 1.6
RBD Celestial 1.3
Joss Stone Introducing Joss Stone 1.3
Utada Hikaru Ultra Blue 1.3
Depeche Mode The Best of Depeche Mode Volume 1 1.2
Janet Jackson 20 Y.O. 1.2
30 Seconds to Mars A Beautiful Lie 1.2
Herbert Gronemeyer 12 1.1
Sarah Brightman Diva: The Singles Collection 1.0
Gerard Rene-Gordon Toppers Kerst Album 1.0
Bob Segar Face The Promise 1.0
Iron Maiden A Matter of Life and Death 0.9
Diam's Dans MaBulle 0.8
,Renaud Rouge Sang 0.8
EMI Music Publishing's Most-Successful Songwriters of FY2007

Amy Winehouse Rehab

Beyonce Irreplaceable
Brad Paisley The World
Death Cab for Cutie Soul Meets Body
Enrique Iglesias Do You Know (Ping Pong Song)
Good Charlotte Lifestyles of the Rich and Famous
Hinder Lips of an Angel
James Blunt Goodbye My Lover
Jay-Z Show Me What You Got
Kanye West Wouldn't Get Far
Kelly Clarkson Never Again
Ludacris MoneyMaker
Natasha Bedingfield These Words
Norah Jones Thinking About You
Ozzy Osbourne I Don't Wanna Stop
Panic! At The Disco I Write Sins Not Tragedies
Pink U+ UrHand
Rob·Thomas Lonely No More
Take That Patience
The Fray How To Save A Life

1AII sales figures are for the 12 months ended March 31,2007. Unit sales include digital albums and digital track
album equivalent.
Source of data: Company annual report.
 Case 27 EMI Group PLC 339

EXHIBIT 27.4 I Consolidated Income Statements (in millions GBP, except per-share, data)

Underlying Revenue 2,175 2,121 2,001 2,080 1,752

Group profit from operations
before exceptional items and amortization 255 249 225 251 151
Exceptional items (21) (138) (18) 3 (307)
Amortization and impairment (43) (51) (48) (50) (53)
Share of profit from associates and jv 1 (0) 1 1 2
Profit (loss) from operations 191 60 161 204 (207)
Exceptional items:
(Losses) on disposal or closure of business (25) (40)
Gains on disposal of PP&E and investments 235 24 2 50
Profit (loss) before finance charges 401 43 161 206 (157)
Finance charges (77) (96) (62) (88) (107)
Profit (loss) before taxation 324 (53) 99 118 (264)
Taxation (83) (20) (24) (28) (23)
Profit (loss) after taxation 241 (73) 75 90 (287)
Underlying EBITDA 1 297 284 250 276 174
Underlying PBT 2 179 163 141 159 63
Earnings per ordinary share:
Basic 29.3p (9.1)p 9.6p 10.9p (36.3)p
Underlying diluted 15.7p 15.5p 13.1p 15.7p 5.8p
IDividend per ordinary share 8.0p 8.0p 8.0p 8.0p 2.0p + TBD I
Net borrowings 3 860 749 858 880 904
Interest cover4 3.9x 3.3x 2.9x 3.0x 1.9x
Dividend coverS, 6 2.0x 1.9x 1.6x 2.0x TBD

1 Underlying EBITDA is group profit from operations before depreciation, operating exceptional items and amortization.

2Underlying profit before taxes (PST) is before exceptional items and amortization.

3Net borrowings is the sum of long-term and short-term borrowings including finance leases less cash, cash equivalents, and liquid funds
investments.

41nterest cover is underlying EBITDA (before exceptional items) divided by finance charges (excluding nonstandard charges).

sOividend cover is underlying diluted earnings per ordinary share divided by dividend declared per ordinary share.

GEMI noted the company targeted an ongoing dividend cover of 2.0x in its 2004 annual report.

Sources of data: Company annual reports and Web site.

340 Part Five Management of the Firm's Equity: Dividends and Repurchases

EXHIBIT 27.8 I Consolidated Balance Sheets (in millions GBP)

8
20
12

741 721 511

Current assets
Inventories 30
Advances 218
Trade receivables 290
Corporation tax recoverable 16
Other receivables 1,01 '
Financial assets o
Investments: liquid funds 2 2
Cash and cash equivalents 241 191 332
1,038 1,096 988
Total assets 1,779 1,817 1,499
Liabilities

42
1,369

Other provisions for liabilities and charges 44 34 111

1,295 1,348 1,280
Total liabilities ,2,575 2,544 2,650
Equity

Capital and reserves

Share premium account 447 448 455

Foreign exchange reserve 4 (17) 20

Retained earnings (2,107) (2,019) (2,451)

Equity attributable to equity holders of the parent (846) (775) (1,154)
Minority interests (equity) 49 49 3
Total equity (796) (727) (1,151)

Sources of data: Company annual reports and Web site.

 Case 27 EMI Group PLC 341

EXHIBIT 27.. I Analysis of Ordinary Shareholdings on May 18, 2006

Small 1 to 500 shares 9,720 50.0 1,923,604 0.2

501 to 1,000 shares 4,243 21.8 3,100,499 0.4
1,001 to 10,000 shares 4,648 23.9 10,864,585 1.4
10,001 to 100,000 shares 434 2.2 15,502,961 2.0
100,001 to 1,000,000 shares 291 1.5 101,194,240 12.8
Large 1,000,001 shares and over 123 0.6 660,339,675 83.3
Total 19,459 shareholders 792,925,564 shares

Substantial Shareholders 1 No. of Shares Percentage of Capital Held

FMR Corp.lFidelity International Ltd. 114,065,999 14.39

Wellington Management Company, LLP 74,460,205 9.39
Deutsche Bank AG 49,278,472 6.21
HBOS pic/Insight Investment Management Ltd. 40,609,739 5.12
The Capital Group Companies, Inc. 40,512,803 5.11
Prudential pic group of companies 37,310,271 4.71
Legal & General Investment Management Ltd. 27,687,735 3.49

1 Substantial shareholders are defined as owning three or more of ordinary shares and/or three or more of the voting rights of ordinary
shares.
Source of data: Company annual reports.
342 Part Five Management of the Firm's Equity: Dividends and Repurchases

EXHIBIT 27.7 I EMI'Projected Sources-and-Uses Statement Assuming Annual S.Op

Dividend Is Maintained 1,2 (in GBP; end of year March 31)

Revenue growth 1.7 0.7

New equity issued 0.6 8.9
Share repurchases 0.5 5.5 0.0 0.0
Dividends 62.9 63.2 63.2 63.2
Financial Statements
Revenue 2,079.9 1,751.5 1,781.3 1,793.7
Net income 90.0 (287.0) (80.4) 26.3
Noncurrent assets 721 511 476 479
Current operating assets 903 654.6 821.0 857.0
Cash 193 333.4 191.0 177.5
TotaI assets 1,817 1,499 1,488 1,514
Debt obligations 1,150 1,317 1,442 1,494
Other noncurrent liabilities 46 52 52 52
Current liabilities 1,348 1,280 1,289 1,299
Total equity (726) (1,151) (1,295) (1,332)
Sources and Uses Statement
Sources
Net income 90.0 (287.0) (80.4) 26.3
New equity issued 0.6 8.9 0.0 0.0
Other adjustments to equity 42.5 (77.6) 0.0 0.0
Increase in debt obligations (12.0) 167.3 124.6 52.2
Increase in other NC liabilities (72.6) 6.7 0.0 0.0
Increase in current liabilities 52.9 ~) 8.9 10.0
Total sources 101.4 (249.8) 53.1 88.5
Uses
Increase in noncurrent assets (19.9) (210.9) (34.1) 2.8
Increase in current operating assets 108.0 (248.2) 166.4 36.0
Increase in cash (50.0) 140.6 (142.4) (13.5)
Share repurchases 0.5 5.5 0.0 0.0
Dividends 62.9 63.2 63.2 63.2
Total uses 101.5 (249.8) 53.1 88.5

1The dividend use in 2007 reflects the 8.0p dividend declared in total for the fiscal year 2006, which was actually
paid in the fiscal year 2007. The impact of the board's decision would be in the 2008 fiscal year.

22008 and 2009 forecasts are from ABN AMRO Equity Research and case writer's estimates. Lehman Brothers
forecasted net profit of GBP (11 0) million and GBP 81 million for 2008 and 2009, respectively.
Sources of data: Company annual reports and Web site; Bridie Barrett, Justin Diddams, and Paul Gooden, ABN AMRO
Bank NV, "EMI, A Special Situation," February 16, 2007; Richard Jones and Tamsin Garrity, Lehman Brothers Eq-
uity Research, "EMI Group," February 15, 2007.
 Case 27 EMI Group PLC 343

EXHIBIT 27.8 I Excerpt from Fischer Black's "The Dividend Puzzl,e,,1

Why do corporations pay dividends? Why do investors pay attention to dividends?

Perhaps the answers to these questions are obvious. Perhaps dividends represent the return to
the investor who puts his money at risk in the corporation. Perhaps corporations pay dividends
to reward existing shareholders, and to encourage others to buy new issues of common stock
at high prices. Perhaps investors pay attention to dividends because only through dividends
or the prospect of dividends do they receive a return on their investment or the chance to sell
their shares at a higher price in the future.
Or perhaps the answers are not so obvious. Perhaps a corporation that pays no dividends is
demonstrating confidence that it has attractive investment opportunities that might be missed
if it paid dividends. If it makes these investments, it may increase the value of the shares by
more than the amount of the lost dividends. If that happens, its shareholders may be doubly
better off. They end up with capital appreciation greater than the dividends they missed out on,
and they find they are taxed at lower effective rates on capital appreciation than on dividends.
In fact, I claim that the answers to these questions are not obvious at all. The harder we look
at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together.
Suppose you are offered the following choice. You may have $2 today, and a 50-50 chance
of $54 or $50 tomorrow. Or you may have nothing today, and a 50-50 chance of $56 or $52
tomorrow. Would you prefer one of these gambles to the other? Probably you would not. Ignoring
such factors as the cost of holding the $2 and one day's interest on $2, you would be indifferent
between these two gambles.
The choice between a common stock that pays a dividend and a stock that pays no dividend
is similar, at least if we ignore such things as transaction costs and taxes. The price of the
dividend-paying stock drops on the ex-dividend date by about the amount of the dividend.
The dividend just drops the whole range of possible stock prices by that amount. The investor
who gets a $2 dividend finds himself with shares worth about $2 less than they would have
been worth if the dividend hadn't been paid, in all possible circumstances.
This, in essence, is the Miller-Modigliani theorem. It says that the dividends a corporation pays
do not affect the value of its shares or the returns to investors, because the higher the dividend,
the less the investor receives in capital appreciation, no matter how the corporation's business
decision turns out. When we say this, we are assuming that the dividend paid does not influence
the corporation's business decisions. Paying the dividend either reduces the amount of cash
equivalents held by the corporation, or increases the amount of money raised by issuing
securities.
If this theorem is correct, then a firm that pays a regular dividend equal to about half of its normal
earnings will be worth the same as an otherwise similar firm that pays no dividends and will
never pay any dividends. Can that be true? How can a firm that will never pay dividends be
worth anything at all? Actually, there are many ways for the stockholders of a firm to take cash
out without receiving dividends. The most obvious is that the firm can buy back some of its
shares. Under the assumption of the Modigliani-Miller theorem, a firm has value even if it pays
no dividends. Indeed, it has the same value it would have if it paid dividends.

1 Fischer Black, "The Dividend Puzzle," Journal of Portfolio Management (Winter 1976).
344 Part Five Management of the Firm's Equity: Dividends and Repurchases

IXHIBIT 27.9 EMI Share Price Performance

700 r-------------------------------

600 1+--1------------------------------

500 I-----\~--------------------------

cv
400 1------.......&...-+-------------------------
u
c
:. 300 I---------t--I---\--------------------,r--~--

200 I---------....-...\------~r----------- . . . . . . .- - -

100 I------------:ftd-------------------

0'--------'------"'-------'------"'------""-----"'-----
May-OO May-01 May-02 May-03 May-04 May-OS May-06

Source: Company annual reports and Web site

 EXHIBIT 27.10 I Global Economic Indicators and Projections

200SE 2005 2006

5.1 3.5 3.9

3.3 3.4 3.2 1.9 2.3
2.5 (0.1) 0.1 0.2
EU27 2.1 3.5 3.0 2.7 2.5 2.6 2.1 2.4
2.1 2.1 2.3
Interest Rate Forecasts, Percentage
3-Month Rates 10 Year Bond Yields
2005 avg. 2006avg. 2007E avg. 200SE avg. 2005avg. 2006 avg. 2007E avg. 200SEavg.

5.23 5.38 4.24 4.79 4.49 5:24

Japan 0.05 0.30 0.74 1.03 1.39 1.76 1.62 1.98
4.37 3.38 3.78 3.86
United Kingdom 4.80 4.85 5.44 4.91 4.40 4.50 4.58 5.18
Real Economy Forecasts
Consumption Expenditure Wage Growth

2005 2006 2007E 200SE 2005 2006 2007E 200SE

2.8 3.9 3.8

Japan 3.5 3.2 2.0 3.0 0.2 0.8 0.7 1.2
- - na na na
United Kingdom 1.4 2.1 2.5 2.0 4.1 4.1 4.4 4.0

Source of data: Societe Generale Economic Research, "Global Economic Outlook," March 14, 2007.

(oN
~
til
~ EXHIBIT 27.11 I Comparative Global Media Data
~

EMI Group pic GBP 31-Mar 2,080 9.8 4.3 nmf 0.72 22.4
Bertelsmann 1 EUR 31-Dec 19,297 9.7 12.6 0.97 na na
Clear Channel USD 31-Dec 7,067 31.8 9.8 0.91 0.42 22.2
Disney USD 29-Sep 34,285 20.2 9.8 0.34 0.16 17.1
IAC/lnterActiveCorp. USD 31-Dec 6,278 15.7 3.1 0.10 0.08 48.9
News Corp. USD 30-Jun 25,327 18.3 10.6 0.38 0.17 23.3
Sony Corporation JPY 31-Mar 7,475,436 2.5 1.7 0.24 na nmf
Time Warner USD 31-Dec 44,224 27.3 11.6 0.58 0.42 14.9
Viacom USD 31-Dec 11,467 28.1 12.9 1.06 0.27 18.5
Vivendi EUR 31-Dec 20,044 21.8 13.0 0.22 na 12.2
Warner Music USD 30-Sep 3,516 14.4 1.3 38.60 0.65 72.2
XM Satellite Radio USD 31-Dec 933 nmf nmf nmf 0.29 nmf
Share Repurchases (millions)4 Dividends Paid (millions)4 Average Dividend Yield (%)5 Payout Ratio (%)6
Data
Currency FY2004 FY2005 FY2006 FY2004 FY2005 FY2006 FY2004 FY2005 FY2006 FY2004 FY2005 FY2006

EMI Group pic GBP 0 0 1 63 63 61 4.8 3.4 3.3 nmf 83 73

Bertelsmann 1 EUR 0 0 0 324 287 120 na na na 27 28 5
Clear Channel USD 1,841 1,070 1,371 256 343 383 1.2 2.1 2.4 31 54 55
Disney USD 335 2,420 6,898 430 490 519 0.9 0.9 1.0 19 18 16
lAC/InterActiveCorp. USD 430 1,848 983 0 0 0 0.0 0.0 0.0 0 0 0
News Corp. USD 0 535 2,027 202 240 431 0.2 0.2 0.8 13 11 16
Sony Corporation JPY 8,523 416 394 23,106 22,978 24,810 0.6 0.6 0.5 14 20 20
Time Warner USD 0 2,141 13,660 0 466 876 0.0 0.6 1.2 0 16 17
Viacom 2 USD na na 2,318 na na 0 na na 0.0 na na 0
Vivendi EUR 27 108 0 0 689 1,152 2.8 4.0 4.3 46 52 53
Warner Music3 USD na 0 0 na 0 74 na 0.0 2.9 na 0 168
XM Satellite Radio USD 0 0 0 0 0 0 0.0 0.0 0.0 0 0 0

1 Bertelsmann is a private German company.

2Viacom split into two companies, Viacom and CBS Corporation, on December 31, 2005.

3Warner Music completed its initial public offering (IPO) in May 2005.

4Dividends-paid and share-repurchases data is sourced from the individual company's cash flow statement.

SAverage dividend yield· calculated as dividends declared per share for a year divided by the average annual price of the stock in the same year.

6Payout ratio calculated as the sum of all cash dividends declared but not necessarily yet paid for a company's fiscal year, divided by net profit for that year.
Sources of data: Value Line Investment Survey and company Web sites.