EMI GROUP PLC
This case examines the April 2007 decision of British music company EMI to suspend its annual dividend as the company struggled to respond to the effect of digital audio distribution on its core business. The EMI case is intended to serve as an engaging introduction to corporate financial policy and themes in managing the right side of the balance sheet. The case contrasts EMI’s storied success with artists such as the Beatles, the Beach Boys, Pink Floyd, and Norah Jones with its recent inability to succeed in financial markets. In light of takeover threats and restructuring costs, EMI’s CFO Martin Stewart must recommend EMI’s dividend policy.
The case serves to accomplish the following teaching objectives:
• Introduce the topics of financial policy, such as dividend policy and debt policy.
• Motivate the tension between investment policy and financial policy with respect to the sources and uses of cash.
• Prompt the Modigliani-Miller intuition of financial policy irrelevance and homemade dividends.
• Discuss the ways in which CFOs add value to firms.
• Review the mechanics of corporate dividends.
Advance Assignment Questions
Students may consider the following study questions:
1. What are the central challenges facing the EMI management team?
2. As CFO, how can Martin Stewart contribute to successfully managing EMI?
3. What do you learn from the sources-and-uses statement provided in case Exhibit 7? What are the implications for EMI’s dividend policy?
4. What dividend policy would you recommend for EMI?
An Excel spreadsheet (Case_27.xls) is available for students.
Hypothetical Teaching Plan
1. How is EMI doing? What are your concerns? What does EMI have going for itself?
2. It seems like this dividend decision is a big deal. Do shareholders generally prefer firms that pay dividends? Do you think EMI shareholders would pay more if EMI promised a 6p dividend?
3. Why should the dividend policy matter much at all? Why is this dividend decision so important to EMI?
4. What should Stewart do?
How is EMI doing? What are your concerns? What does EMI have going for itself?
In April 2007, EMI management faces an important challenge as it searches for a new business model in a digital music world. Annual revenue is down 16% for the year and 19% since 2003. Investors are reeling from a series of negative-earnings-guidance surprises. Earnings per share for the year will be announced at −36.3p per share, the company’s worst profit figures. The industry continues to look for a bottom in the effect of digital audio distribution among the major companies (Warner Music, Sony BMG, and Universal Music). EMI is attracting takeover interest from rivals, including the recent 260p offer from its U.S. rival, Warner Music. The company is currently involved in a GBP125 million to GBP150 million (British pounds) restructuring effort that is taxing its financial resources.
Still, EMI has much to celebrate. It maintains one of the strongest catalogs of music and artists in the industry. EMI’s music-publishing division is stable and profitable, and its restructuring efforts appear to be gaining traction. EMI’s digital sales are expanding aggressively and now represent 10% of group revenue. The company also made an agreement with Apple to be the first major music company to offer its digital catalog using the new format that maintains better sound quality and fewer rights’ restrictions.
Given that backdrop, EMI’s CFO Martin Stewart must recommend a dividend policy for EMI. Maintaining the 6p-per-share end-of-year annual dividend would require GBP63 million of EMI’s cash resources. Omitting the dividend may further disappoint investors and lead to greater softening of EMI share values in the market.
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