Europe's Demands Could Affect Worth of Universal-EMI Deal The endgame in the music industry's most controversial deal will begin this week in Brussels. There, executives of the Universal Music Group will meet with members of the European Commission to discuss concessions to Universal's $1.9 billion bid for EMI's record labels. The deal, which would give Universal a global market share of about 40 percent, has been loudly criticized by rivals and consumer advocates, who worry that such concentration could hurt artists and fans. But for Universal and its parent company, the troubled French conglomerate Vivendi, a more immediate concern is that this week's discussions will effectively set the value of the deal itself. When Universal bought EMI from Citigroup last November, the label assumed all regulatory risk in the deal, agreeing to pay more than 80 percent of the price by September, whether the deal was approved by regulators or not. In the United States, the Federal Trade Commission is investigating the deal. The review in Europe has been tougher than expected, with regulators rejecting some of Universal's core arguments, including its assertion that online piracy would keep the enlarged company in check. To win approval, Universal is expected to sell pieces of EMI or its own catalogs. Universal had been largely silent about this possibility until last week, when its chairman, Lucian Grainge, told The Financial Times, "I'm extremely open-minded about working with the commission in the context of behavioral remedies as well as divestitures." For media analysts, the critical question now is not just whether Universal will divest assets, but whether it will have to sell so many that the deal will no longer be attractive. "There's no question that we expect that these divestitures will erode some of the potential values and synergies," said Tuna N. Amobi of Standard & Poor's Equity Research. The only question is how much value will be eroded. Universal, formed through mergers in the 1990s, is the largest of the four major record companies; EMI, with roots in 19th-century Britain, is the smallest. But EMI's catalog includes jewels by the Beatles, the Beach Boys and Frank Sinatra, as well as more recent hits by Norah Jones and Lady Antebellum. According to two people who had been briefed on the negotiations but were not authorized to speak publicly, two likely EMI divestments are Virgin Records and EMI Classics. To appease regulators, Universal could either offer European rights to music under those labels, or sell the labels outright. Another likely spinoff is EMI's distribution rights to the independent label Mute, the sources said. EMI's music publishing holdings were sold for $2.2 billion to an investor group led by Sony; that deal, seen as less troubling to regulators, closed last month. The music industry, which 15 years ago had six major labels, has consolidated in the last decade as it has been transformed by the shift to digital media. Today it is essential for labels to maintain vast song catalogs, as leverage in negotiating with digital services and to extend the traditional risk economics of the industry, in which the failures of the many are subsidized by the hits of the few. Samina Karim, an assistant professor at the Boston University School of Management who specializes in mergers, likened it to the model of the pharmaceutical industry. "Most drugs don't make it through efficacy trials, and most artists do not make hits," she said. In both industries, they want to have more to gamble with in order to cover their losses. For Universal, whose price for EMI was seven times earnings, the value of the deal could drop significantly if it is forced to sell assets at low prices, therefore losing expected efficiencies. According to rough calculations by commentators, a divestment of 10 to 15 percent of EMI's catalogs could cost Universal as much as $400 million. A Universal spokesman declined to comment for this article. The success of the EMI deal is also critical to Vivendi. Stock in that company is near a nine-year low. Last month, its chief executive, Jean-Bernard Lévy, stepped down in a boardroom struggle. Like Mr. Lévy, Jean-René Fourtou, the chairman, is said to support the merger. Universal's unusual deal to assume all regulatory risk is now seen as a liability, but many analysts said the company probably had no choice, given the music industry's past regulatory challenges. The Warner Music Group, a Universal rival that has lobbied hard against the Universal-EMI merger, has tried to merge with EMI several times only to be rebuffed by regulators. When Sony Music made a deal to merge with BMG's record divisions in 2004, it went through two long rounds of regulatory review in Europe before gaining final approval. "There was no way that Citi would agree to sell to the market leader, in a sector where in the past regulators have been extremely skeptical about consolidation, without Universal taking on the risk of the transaction," said Claudio Aspesi, an analyst at Sanford C. Bernstein & Company in London. Universal must propose remedies for the European Commission's concerns by Wednesday. The proposal could include divestments and so-called behavioral remedies like changes to licensing contracts. The commission's deadline to rule is Sept. 6, although it could decide earlier. The F.T.C., whose investigation is not public, is also expected to rule in coming weeks. For Universal, the least painful course would be to sell rights to its music only in Europe, where in some countries its combined market share would creep above 50 percent. That could satisfy regulators" concerns about cultural diversity. But Universal may be required to sell worldwide rights, as Sony did to win approval for its EMI publishing deal. Either way, Universal is betting that the long-term value of EMI's songs will outweigh any short-term losses, even if they run high. "It's clear that it's better for them to engage with the regulators and sell perhaps more than they had originally intended," said Omar Sheikh, a media analyst at Credit Suisse. They'd much rather the deal be approved than not.