What now for EMI as Warner deal flounders?

M&S struggles on; Turkey dance

EMI's plans to merge its music interests with those of Time Warner never looked particularly appetising in the first place. The terms always seemed too favourable to Time Warner. The interference of European competition authorities has made them even less so, and the transaction now seems to be finally on its last legs.

EMI's plans to merge its music interests with those of Time Warner never looked particularly appetising in the first place. The terms always seemed too favourable to Time Warner. The interference of European competition authorities has made them even less so, and the transaction now seems to be finally on its last legs.

EMI should have thrown in the towel last month when it failed to get the deal through a stage two European Commission investigation. Instead it chose to limp on, professing confidence that eventually it would be able to come up with a set of proposals acceptable to the Commission.

It was obvious to outsiders at the time, but the penny now seems to have dropped with insiders too; in order to satisfy the Commission, EMI would be forced to give so much away that the deal would lose much of its scale and cost-cutting purpose. At some stage, EMI is going to have to bite the bullet and formally announce that the merger talks have been abandoned. For Eric Nicoli, the chairman, this is more than just an embarrassment, for as far as anyone can tell, there is no plan B. He has staked both his own and the company's future on the Time Warner deal going through and his position is bound to be in doubt if it does not.

Of course, once he's finally called it a day with Time Warner, he's free to talk to others, and it may well be that Bertelsmann, which wants to get bigger in music and has a multi-billion pound war chest with which to pursue its aims, will come knocking.

Unfortunately, Bertelsmann too faces some formidable obstacles in mounting a convincing bid for EMI. One of them is that it would run into many of the same competition issues that have so dogged the merger with Time Warner. Another is that its management and strategy is in a state of flux. Over the weekend, both the chairman of Bertelsmann Music Group, Michael Dornemann, and his chief executive, Strauss Zelnick, quit. Bertelsmann's deal with Napster, which allows free exchange of music over the internet, must have played some part in their decision. In any case, BMG is a far from happy ship right now.

So it may be that EMI is going to have to reconcile itself to an independent future after all, and if that's the case, Mr Nicoli may not be the man for the job. EMI is not doing badly at the moment and is still managing to find and retain some big acts. But EMI was built on British popular music, and as George Michael has pointed out, Brit pop is not what it was. EMI has limited scale in the US, and without it the company may struggle to make progress. That, in any case, has been the Nicoli analysis, and that, in essence, is why he settled on the Time Warner marriage.

But was this not always too defeatist and narrow-minded an approach? It may have been. Mr Nicoli, for all his talents, is not a music industry player and it is sometimes hard to avoid the impression that he was deliberately foisted on the company by the City in order to prepare it for sale.

If EMI is to remain independent after all, its future must surely lie as a copyright and entertainment promotions company. Too small, perhaps, to make progress in manufacturing and distribution, it should exit these businesses and instead concentrate on exploiting its back catalogue and developing new talent. To do this effectively, it needs a chief executive steeped in the music business. Ken Berry, chief executive officer of EMI Recorded Music, would do just fine, but there is also a legion of talented outsiders who would give their eye teeth for the job. And nor would they demand a Jim Fifield-style remuneration package to do it.

M&S struggles on

It is exactly two years since Sir Richard Greenbury, then chairman of Marks & Spencer, warned of a "bloodbath" in the UK clothing market. That warning, combined with a grim set of trading figures, marked the start of the permanent state of crisis we have come to associate with poor old M&S. At that point M&S shares were still trading at over 600p. The previous May the business had become the first UK retailer to report profits of more than £1bn.

Today the shares trade at less than 200p, full-year profits will be less than £500m this year, and M&S is doing a passable impression of a deranged dog chasing its own tail. Bewitched and bewildered, this once grand old dame of the high street doesn't seem to know whether she's coming or going.

Yesterday's results were actually not as bad as the City was expecting, but there were still some horrors. Luc Vandevelde, the group's suave Belgian chairman, admitted that M&S has been so busy changing everything that it has taken its eye off the "basics of retailing". It seems that product quality, stock availability and visual presentation went out the window as managers worked on such knotty issues as developing new carrier bags and hiring Tara Palmer Tomkinson to front a new bra range.

M&S is grasping the nettle in one respect. It has finally conceded that it has too much retail space in Britain and that its takeover of 19 Littlewoods stores three years ago was an epic blunder. Almost a third of that space is now being closed. Even so, closing just six "satellite" stores out of a total of 298 doesn't amount to any more than fiddling around the edges. Maybe Mr Vandevelde, Sir Richard's successor, is anxious not to demoralise staff ahead of the all important Christmas trading season, but there obviously needs to be more action like this.

The uncomfortable truth is that M&S has too much space chasing a shrinking market. The persistent year-on-year fall in underlying sales must surely tell the board as much. Can Mr Vandevelde turn it around? He has wisely given himself a two-year window in which to engineer an M&S recovery. After eight months that recovery still looks as far off as ever, though for the record, Mr Vandevelde insists that next year will be the year. Let's hope he's right. But if he isn't shareholders should not hold their breath for a bid. Philip Green may have assembled a top quality management team at Bhs, but there is a big gap between doing that and mounting a credible bid. And in the meantime M&S shares may have further to fall.

Turkey dance

Bernard Matthews has played a canny game in taking his turkeys company private. It is hard to believe he cannot have known about Sara Lee's interest in bidding when he made his own offer, but with 42 per cent of the stock spoken for by family and management, Sara Lee was always going to find it difficult to enter the fray without his say-so. Just to make sure, Mr Matthews secured the irrevocable undertaking of his largest outside shareholder, Royal & SunAlliance, to accept his offer before going public with it.

The terms of this undertaking are so watertight as to make it pretty much impossible for Sara Lee to gatecrash the party. Royal can only be released from the undertaking if a rival bids 10 per cent or higher more than Mr Matthews.

Mr Matthews then has the right to match that bid, at which point the irrevocable undertaking is triggered again. Outside shareholders could almost certainly have secured a better price from Sara Lee than they are getting from Mr Matthews, but then getting stuffed for Christmas is part of the price you sometimes pay for investing in companies dominated by a determined entrepreneur.

* outlook@independent.co.uk