FD Interview - Analysis - Facing the music

Appointed CFO to EMI on the day the company issued a profits warning, Roger Faxon has had to face some tough challenges, he tells Jenny Hirschkorn.

Roger Faxon, chief financial officer of music group EMI, has a somewhat unenviable claim to fame. He reckons he is the only finance director to be appointed on the day his company issued a profits warning. That was in February 2002 and in his two years in the job Faxon has had some tough challenges to face.

He was brought in from his previous post as FD of EMI Music Publishing, the division that manages music copyright, by group chairman Eric Nicoli to complete a new-look management team as the business struggled to overcome two failed merger attempts and this, the second of two profits warnings.

Faxon's resume couldn't be more different from that of the average FTSE 250 finance director. For one thing, he is an American. Born 55 years ago in Concord, New Hampshire, he read political economy and international affairs at Baltimore's Johns Hopkins University.

Star role

Second, he has no formal finance training. No PwCs or Andersens on his CV. Instead, he followed his graduation with six years on the staff of the US Congress before being introduced by a friend to film maker George Lucas, then riding high on the crest of the Star Wars wave.

Faxon took on the role of chief operating officer of Lucasfilm, turning it into 'a real business' and becoming involved with the formation of the mighty Industrial Light & Magic and Pixar, the computer animation division later sold to Apple founder, Steve Jobs.

In all, he spent 10 years in the film business, following his time at Lucasfilm with posts at The Mount Company and Columbia Pictures, but finally changed sectors when he joined Sotheby's, initially as chief operating officer, North and South America, and later as managing director, Europe.

But his wife, Amy, wanted to return to the States, so he started exploring other possibilities. That is how he came to ask his old friend Jim Fifield, whom he had known since his Lucasfilm days, for advice.

Fifield, who was then boss of the music division of ThornEMI, invited Faxon to become his planning director, a job that Faxon describes as 'very unusual in the sense that things which are typical FD functions were vested in the planning director's role'.

Although he knew little about the music industry, by returning to the type of creative environment he had so enjoyed in the movie business, Faxon felt immediately at home.

Five years later, as EMI demerged and became, essentially, the business that it is today, Faxon finally took on his first true finance role working for Marty Bandier, head of the publishing group.

'That is one of the great jobs in the music industry,' Faxon enthuses. 'You are working with the best. I just loved music publishing.'

When the call came from Nicoli, Faxon admits he was faced with a dilemma.

'It was hard to say yes, because there were formidable issues to be addressed and I already had a really great job, but it would have been harder to say no. It was a tremendous opportunity and I never anticipated that I would be finance director of as important a British company as this.'

There was also, of course, the thorny question of relocating back to the UK, a problem Faxon has overcome by becoming a transatlantic commuter.

His wife and two young daughters have remained in New York and come to London during the holidays, while Faxon gets home as often as he can.

'A big part of our business is in the States, but I don't spend as much time there as I thought I would when I took this job.'

Once he had taken the plunge, top of the agenda was having to refinance three-quarters of the group's 1.3bn revolving credit - no easy task in the wake of a profit warning. 'The company had run its financial affairs using short-term credit and had always had easy access to it.'

Problem of piracy

But although EMI's portfolio includes big names like Robbie Williams, The Beatles and Coldplay, the company, like the rest of the music industry, was facing a major crisis, mainly because of piracy - both the physical pressing of discs and the online downloading of unauthorised tracks. This meant decreased stability and weaker cashflow, which in turn created tension in EMI's banking relationships, 'No company should be exposed to that level of short-term capital. You just don't know what the vagaries of credit markets are going to do to you.'

Under Faxon's stewardship, EMI quickly developed a strong relationship with a banking group which was very supportive until the refinancing could be put in place. A 325m sterling bond was issued in the early summer of 2002, which took the steam out of the situation, and part of the balance was paid down through the disposal of EMI's stake in HMV and the sale of fixed asset investments. The group further diversified its sources of credit in the autumn of 2003 with a heavily-oversubscribed $243 (133m) convertible bond, followed by a senior note that raised a further EUR425m (294m), well in excess of the amount envisaged at the time of launch.

This is all the more creditable since it was played out against the uncertain background of a likely takeover of the recorded music business of Time Warner, a deal that seemed to be in the bag even as late at mid-November, when the company's interim results were announced. Yet the very next day came the news EMI had lost out to a private equity group led by Seagram heir, Edgar Bronfman.

How did Faxon feel when the deal collapsed? 'We had a fully-financed deal, on very favourable terms to us, and again we had a very supportive banking group. We were certainly disappointed and would have liked to have done the deal. The opportunities for cost savings and improvements were quite considerable, but from start to finish it involved eight weeks of activity and did not distract from the business.'

So why did it all fall through? 'They (the consortium) were offering for the whole business while we were only looking at the recorded music business. They were making an all cash offer while we were making a cash and equity offer. But the real issue was that there was concern about the time it would take to go through the regulatory process. While the risk may have been generally acceptably, there was still a risk. So the certainty of one offer as opposed to the regulatory conditionality of the other is what chose them to accept the offer from Bronfman.'

Meanwhile, the market's reaction to the failure of the deal was mixed.

The shares slipped back marginally, but, to the time of writing, have remained relatively steady. The credit rating agency Standard & Poor's took EMI off CreditWatch, because, it said, the withdrawal of the offer 'takes away uncertainty about how such a transaction might be financed'.

Faxon's response was that, if S&P had understood the financing, it would never have issued a CreditWatch in the first place.

Fundamental challenges

None of this, says Faxon, has distracted the management from the fundamental challenges that they face in revitalising a business hit by flagging CD sales and rampant theft of copyright.

He believes consumers are willing to fork out their hard-earned cash for music if it is good. 'Good in this world means that the customers develop a strong rapport with the artists. We are in a culture over the past few years where music has been a disposable commodity. The Pop Idol approach to the world, where you manufacture an artist who does very well one time only, doesn't achieve that with rapport with consumers.'

The industry, says Faxon warming to the subject, has lost the plot. EMI, he believes, understands that plot and what it has to do is make sure that its artists are going to be around for a while.

There is considerable excitement in EMI's snazzy Kensington offices on the day of our meeting, as the papers are carrying rave reviews of someone who might just be the sort of performer Faxon is talking about. In the Financial Times, Richard Milne describes 16-year-old Joss Stone's voice as 'little short of sensational, soaring and dipping but never overly demonstrative'. Could this teenager from Devon be the next queen of soul?

Producing music fans want to hear is one thing. Making sure they access that music legally is quite another, but one that Faxon and Alain Levy, EMI Recorded Music's French chief executive, believe is almost entirely within the power of governments to control.

'Alain and I have spent huge amounts of time trying to drive governments to do something about this. They must intervene and enforce the counterfeit laws.'

It is not only a matter of seizing the huge numbers of fake discs that hit the market globally, but also of tackling online piracy, which is the prevalent form in the US. 'We are discouraging illegal activity in quite an unusual way. We are suing our consumers. That certainly rivets people's thinking.'

Faxon maintains that, following a huge education drive by the industry in the middle of last year, almost 70% of people now understand that it is illegal to download music without paying for it. The threat of $100,000 fines has reduced traffic on illegal sites by 15%-20%.

While technology might have delivered a huge blow to the music industry through such illegal activity, Faxon says it can also be harnessed to spur future growth.

'We will be able to service consumers in so many new ways.' So, as well as downloading material from legitimate internet sites, you might walk past a kiosk in the street and load up your iPod, you might walk through a store with your mobile phone on your belt and earphone in your ear and be able to select the music you want to hear, or you might follow the Japanese and transform your mobile phone into a portable karaoke machine.

'The market will be tough for a couple of years to come, no question about it,' says Faxon, 'but we think we are as well positioned as any to work our way through that, maintaining profitability and sales and becoming a leader in supporting the new distribution models.'


Who: Roger Faxon

When: 16.6.48

Where: Concord, New Hampshire, US

Education: BA, political economy and international affairs, Johns Hopkins University, Baltimore.

Work: Policy maker, US Congress; chief operating officer, Lucasfilm; chief operating officer, Columbia Pictures; chief operating officer, Sotheby's, North and South America, then managing director, Sotheby's, Europe; senior vice president, business development and strategy, EMI Music, executive vice president and chief financial officer, EMI Music Publishing; chief financial officer, EMI Group.

Life: He is an avid skier, sailor and cycling enthusiast, as well as a voracious reader of non-fiction.


•   EMI Group is divided into two principal businesses: EMI Recorded Music and EMI Music Publishing.

•   Group turnover for the year to 31 March 2003 was 2,175m, down from 2,445m in the previous year.

•   Profit before tax, amortisation and exceptional items improved by 15.7% to 177.3m.

•   Norah Jones, daughter of renowned sitar player and composer Ravi Shankar, was the recording sensation of 2002-03, selling 11.8m copies of her Grammy Award-winning album, Come Away With Me. She swept up a further five Grammies, including song of the year and best female pop vocal.

•   EMI is the world's largest music publisher in terms of copyrights owned, controlled or administered, with rights to more than 1m musical compositions and offices in 30 countries.

•   Recorded Music has over 1,500 artists, spanning every leading music market and genre.

Be the first to vote

Rate this article

Related Articles