EMI shares plunge on warning profits will drop by 20%

Music

Shares in EMI plunged 35 per cent yesterday after the music group warned pre-tax profits for the year to March 2002 would fall 20 per cent to around £130m. Analysts had expected earnings of about £260m.

Shares in EMI plunged 35 per cent yesterday after the music group warned pre-tax profits for the year to March 2002 would fall 20 per cent to around £130m. Analysts had expected earnings of about £260m.

The downturn, which follows two failed merger attempts in as many years with AOL/Time Warner and Bertelsmann Music, could force EMI to pare its dividend. Yesterday's £900m fall in EMI's market value to about £1.7bn also threatens its position in the FTSE 100 and makes it vulnerable to a takeover.

Commenting on the setback, EMI's chairman, Eric Nicoli, said: "We have wasted no time in addressing our cost base ... we expect a much improved performance from recorded music in the second half, together with another good contribution from music publishing."

The company blamed the downturn on a "marked deterioration" in sales in the US and Latin America since July. It termed September trading, exacerbated by the 11 September terrorist attacks, as "particularly difficult". Recorded music sales in the current year will be below year ago levels, EMI said, adding that the division will post a small first-half loss compared with an operating profit last year of £55m. A strong release schedule in the second-half, including new albums from Lenny Kravitz and Robbie Williams, is expected to see operating profit reach the same levels as a year ago.

One analyst expressed scepticism about EMI's optimism. "I find it difficult to imagine how second-half profit will match the year ago performance. They are trying to keep their volumes up but the cost of doing that is going up all the time."

The company is seeking a further rationalisation of the recorded music business on top of 100 redundancies in its Latin American operation. Underperforming labels will be restructured, European and North American back offices will be consolidated and EMI will seek an exit from manufacturing and distribution functions. Restructuring provisions are expected to reach £100m eventually, although the company expects £65m benefits a year.

One institutional investor, noting that the dividend cover is set to fall from 1.4 to 1.0, said a cut in the payout was inevitable. EMI paid out £125m, or 16p a share, last year. Music groups have been hurt by shrinking sales, which analysts have blamed partly on illegal copying of songs over the internet and weaker CD replacement sales.

A takeover of EMI could prove difficult in the near-term, analysts said, noting that regulators would not permit a deal with another music major. Media conglomerates such as Walt Disney and Rupert Murdoch's News Corp could be suitors, but analysts believe they may await signs of a turnaround at EMI before springing.