Common Music Group‘s Virgin Music Group revealed in December that it had agreed to purchase Downtown Music Holdings LLC in a $775 million deal
On Friday (April 25), Europe’s competitors watchdog – the European Fee – revealed that it’s getting ready to analyze the proposed deal.
The EC determined to look into the deal as a result of the Netherlands triggered a authorized mechanism in EU competitors legislation referred to as Article 22.
In recent times, Article 22 – which we clarify in additional element beneath – has been utilized by particular person EU member states in various high-profile M&A offers.
In December, for instance, the European Fee cleared unconditionally NVIDIA’s $700 million acquisition of AI firm Run:AI, concluding that the transaction would increase no competitors considerations within the European Financial Space, after it was referred to the EC by Italy, utilizing Article 22.
In a plot twist, NVIDIA sued the European Commision earlier this yr over its resolution to probe the deal. As reported by Reuters, the EC’s authority over mergers in Europe might be curbed if NVIDIA wins the case.
In 2022, the EC authorized Meta’s acquisition of buyer relationship administration platform Kustomer with cures. Austria referred the case beneath Article 22, which was then joined by a number of different nations.
Apple‘s $400 million Shazam acquisition in 2018 was additionally investigated by the EC after it was referred by Austria and 6 different Member States beneath Article 22. The Fee performed an in-depth investigation and authorized the acquisition.
Three huge offers, three vital approvals.
One current instance of a deal referred to the EC by way of Article 22 that wasn’t authorized revolved round Illumina’s $7.1 billion acquisition of Grail, an organization growing most cancers detection checks. It was referred to the EC by France and joined by different nations.
The EC investigated the deal, and prohibited the acquisition in September 2022, citing considerations in regards to the deal’s influence on the aggressive panorama of early most cancers detection checks.
Illumina launched a court docket battle towards the EC, which it received, with the European Courtroom of Justice overturning the EC’s resolution, discovering that the Fee lacked jurisdiction to evaluate the deal beneath Article 22.
Illumina argued the deal fell outdoors the Fee’s jurisdiction. The ECJ finally agreed with Illumina, ruling that the Fee’s evaluate was illegal, as reported by Reuters.
As you’ll be able to see, Article 22 was the authorized device utilized in Europe to refer every of these offers to the EC. Right here’s what it means, how the investigation course of works, and what it tells us in regards to the UMG/Downtown deal’s probabilities of approval.
1. What’s Article 22
Article 22 of the European Fee’s Merger Regulation (ECMR) is usually referred to as the “Dutch clause” and permits EU Member States to refer merger circumstances to the European Fee for evaluate, even when these mergers don’t meet the EU-level notification thresholds.
It was launched as a part of the unique European Merger Regulation (Council Regulation 4064/89), which was adopted on December 21, 1989, and got here into impact on September 21, 1990.
This was the primary complete EU-level merger management system, and Article 22 was included from the start as a mechanism to handle the truth that some Member States (notably the Netherlands) didn’t have their very own nationwide merger management regimes at the moment. The Ne
2. What occurs when a member state triggers Article 22?
To set off Article 22, a Member State should submit a written referral request to the Fee inside 15 working days of being knowledgeable of the merger.
The request should reveal that the “focus” – i.e. the alleged dominant positioning of the proposed mixture of the events out there – may:
“(i) have an effect on commerce between Member States; and (ii) threaten to considerably have an effect on competitors throughout the territory of the Member State or States making the request”.
There’s additionally a key a part of the Article 22 course of that speaks volumes in regards to the wider European market’s urge for food for investigating the UMG/Downtown deal particularly.
As soon as the European Fee receives a written referral from anybody member state, the EC instantly notifies all different European States in regards to the referral request.
All different European Union Member States and European Financial Space (EEA) states – together with giants like Germany, France, Spain and Italy – then have 15 working days from receiving this notification to affix the request.
The Fee then has 10 working days from the tip of the becoming a member of interval to determine whether or not to simply accept the referral.
Within the case of the Downtown deal, which the Netherlands referred to the EC by triggering Article 22, Austria was the one different European state that selected to affix the referral.
A giant level to notice right here is that the window for the opposite member states to affix the referral is now formally closed, which implies no different European nation can be part of the Netherlands and Austria because the investigation course of rolls out.
3. The significance of Turnover Thresholds in all of this
The European Fee explains in a doc outlining its merger management procedures that it investigates mergers and acquisitions that exceed particular turnover thresholds to evaluate their potential influence on competitors throughout the EU inside market.
These thresholds decide whether or not a transaction has an “EU dimension” requiring notification to and clearance from the Fee.
That “EU Dimension” half signifies that each firms concerned in an acquisition have to satisfy sure annual turnover thresholds within the EU and globally earlier than they’re required by EU legislation to inform the EC of their intention to strike their deal.
Curiously, the EC confirmed on Friday that UMG’s proposed Downtown deal “doesn’t attain the turnover thresholds set out within the EUMR [EU Merger Regulation]”.
UMG was subsequently not initially required to inform the European Fee in regards to the deal.
Common was required, nonetheless, to inform two particular European member states in regards to the deal: the Netherlands and Austria, the place, in accordance with the EC, it did meet “the related nationwide turnover-based notification thresholds.”
In Austria, a transaction requires notification to the Austrian Competitors Authority if the businesses’ mixed worldwide turnover exceeds €300 million and Mixed Austrian turnover exceeds €30 million; and at the very least two undertakings every have Austrian turnover exceeding €1 million.
In the Netherlands, a transaction requires notification to the Dutch competitors authority (ACM) if the businesses’ mixed worldwide turnover exceeds €150 million; and at the very least two undertakings every have Dutch turnover exceeding €30 million.
Common Music Group’s general international annual revenues in FY 2024 (throughout recorded music, publishing, and extra) stood at EUR €11.834 billion (USD $12.81bn).
In keeping with Dutch firm filings, the gross revenues of Downtown-owned FUGA alone had been €187.78 million in 2023, and €168.44 million in 2022 (see beneath).
The thresholds are significantly greater at an EU degree. A transaction has an “EU dimension” requiring notification to the European Fee if both set of the next thresholds is met:
Main Thresholds:
- Mixed worldwide turnover exceeds €5 billion, and;
- No less than two undertakings every have EU-wide turnover exceeding €250 million
- UNLESS every enterprise achieves greater than two-thirds of its EU-wide turnover in a single Member State
Secondary Thresholds:
- Mixed worldwide turnover exceeds €2.5 billion, and;
- Mixed turnover exceeds €100 million in every of at the very least three Member States, and;
- No less than two undertakings every have turnover exceeding €25 million in those self same three Member States, and;
- No less than two undertakings every have EU-wide turnover exceeding €100 million
- UNLESS every enterprise achieves greater than two-thirds of its EU-wide turnover in a single Member State
Transactions assembly both set of thresholds should be notified to and cleared by the Fee earlier than implementation.
4. We at the moment are within the ‘pre-notification’ interval’
UMG is now required to inform the European Fee in regards to the deal. It’s now within the pre-notification interval.
The pre-notification interval refers back to the part after a deal is referred by a Member State competitors authority beneath Article 22 of the EU Merger Regulation, however earlier than formal notification.
Throughout this era, events have interaction with the competitors authority by pre-notification discussions. These discussions purpose to handle preliminary points, similar to jurisdiction questions, and make sure the notification shall be full when formally submitted.
This course of permits events to resolve potential considerations early and put together complete data for the following investigation part.
It’s a vital preparatory stage that helps streamline the formal evaluate course of as soon as notification happens.
There is no such thing as a deadline for the formal notification to be filed with the European Fee.
5. formal notification of the deal to the EC and a Section 1 investigation
After formal notification beneath Article 22 of the EU Merger Regulation, the formal evaluate course of – the Section One investigation – begins.
The competitors authority has 25 working days to conduct its Section I investigation, analyzing whether or not the alleged “focus” raises severe competitors considerations.
Throughout this era, the authority opinions the submitted data, might request extra knowledge, and doubtlessly seek the advice of third events like rivals and clients.
If considerations are recognized, the authority can both settle for cures from the events or open an in-depth Section II investigation, which extends the evaluate by as much as 90 extra working days.
Alternatively, if no severe considerations are discovered throughout Section I, the deal shall be cleared unconditionally, permitting the transaction to proceed.
In keeping with the European Fee, “greater than 90% of all circumstances are resolved in Section I, usually with out cures,” which suggests that lower than 10% of circumstances proceed to Section II.
6. A Section II investigation may be very uncommon
Within the uncommon occasion {that a} Section II investigation is launched beneath the EU Merger Regulation, the European Fee conducts an in-depth examination lasting 90 working days, which will be prolonged by 15-20 extra working days if wanted.
Throughout this era, the Fee completely investigates competitors considerations by intensive doc opinions, stakeholder interviews, and financial analyses. The events have alternatives to supply cures addressing recognized points.
The Fee might request vital extra data and maintain formal hearings with the events and third events. On the conclusion, the Fee can both clear the merger (with or with out situations), or prohibit it solely if competitors considerations can’t be adequately addressed.
Simply to reiterate these stats from above, Section II investigations are uncommon, representing lower than 10% of all EU merger circumstances.
7. A closing thought..
Based mostly on historic precedents, the percentages appear to favor approval of the UMG-Downtown deal, presumably with situations.
Not like the blocked Illumina-Grail merger, which concerned considerations about eliminating future competitors in most cancers screening, the music business has already seen vital consolidation, and the EC has usually authorized such offers.
Additionally, the current ECJ ruling within the Illumina/Grail case doubtlessly modifications the Article 22 panorama.
The ruling limits the Fee’s skill to evaluate transactions that fall beneath each EU and nationwide merger management thresholds, which may have an effect on how future Article 22 circumstances are approached. The ruling was described in an article within the Journal of Antitrust Enforcement as “a watershed second for EU merger management”.
“We’re assured that we’ll shut this acquisition within the second half of the yr, on its unique timeline.”
Common Music Group
For Common Music Group, this regulatory scrutiny comes at a time when the corporate continues to increase its international footprint.
The acquisition of Downtown would add vital artist and label providers capabilities to UMG’s portfolio by Virgin Music Group with the addition of Downtown-owned FUGA, CD Child, Curve Royalty Programs, and different firms throughout the Downtown portfolio.
The end result of this investigation shall be intently watched by the worldwide music business, because it may set up precedents for future music business consolidation and M&A exercise within the European market.
In an announcement issued final week, UMG was bullish about its prospects of successful approval for the deal: “We look ahead to persevering with to co-operate with the European Fee within the weeks forward. We’re assured that we’ll shut this acquisition within the second half of the yr, on its unique timeline.”
Music Enterprise Worldwide
