EMI renews efforts in pursuit of Warner

Music giant EMI is preparing a renewed bid for Warner Music after its US-based rival rejected a US$4.23bn cash-and-shares offer.

Warner said yesterday that EMI's bid - its third attempt in six years to woo the US music group - was not in the best interests of its shareholders, but sources close to EMI described it as "a first offer" that they had expected to be dismissed.

A duet between the industry's number three and four players has been long-anticipated, but the offer of US$28.50 per Warner share, delivered on Monday by Eric Nicoli, EMI's chairman, proved a disappointment after several weeks of rumours that talks were back on.

Their first attempt at a merger in 2000 was vetoed by European competition authorities.

The pair talked again in 2003 but Warner Music was eventually sold by its owner Time Warner to a private equity consortium.

A deal would bring together Coldplay and Kylie Minogue from the EMI side, with the Red Hot Chilli Peppers and Madonna.

It would also open up the opportunity for another round of cost savings in an industry ravaged by internet piracy and the decline of CD sales.

And it would give Edgar Bronfman, the Seagram whisky heir who led the private equity buy-in of the company in 2004, a lucrative and reputation-enhancing exit to pursue new ventures.

EMI said that "the board continues to believe that an acquisition of Warner Music by EMI would be very attractive to both sets of shareholders", although it cautioned that it would not do a deal that diluted earnings.

Smoke signals from both camps suggested that haggling over price is set to resume, with results due from Warner tomorrow likely to be particularly important.

EMI is said to have scope to increase the cash element of its bid.

Analysts have also begun to assess the possible cost savings EMI could wring from any deal, which might allow it to raise its offer.

Lorna Tilbian, a media sector analyst at Numis Securities, said you only need look to Kensington in London - where both companies have lavish headquarters - to see that there is significant overlap that could be removed.

She said: "We estimate that an EMI-Warner combination would potentially yield savings of £100m.

"But the companies' announcements highlight the difficulties in putting together such a deal, particularly with respect to valuation and management. Moreover, if Warner is holding our for a higher price, this raises the risk that EMI could overpay."

EMI shares closed down 4 per cent at 270.5p, while Warner Music's moved up in early trading, but remained below the level of EMI's offer.

Sources said Warner Music's management remained open-minded about the prospects of a deal, but were also considering other options, including its own eventual bid for EMI.

Both management teams have argued that a "merger of equals" is unlikely to succeed in an industry fuelled by giant-size egos.

A takeover of one by the other would leapfrog the combined group into second place in the global music industry, behind Universal Music.

Time Warner sold Warner Music for US$2.6bn to a private-equity consortium consisting of Thomas H Lee, Bain Capital and Providence Equity Partners when concerns about music piracy were at their most rampant.

A Wall Street flotation last year meant they had made back their original investment, but they still control 75 per cent of the company.

Mr Bronfman, who owns 10 per cent, has stripped out US$250m of costs by axing 20 per cent of the workforce.

The turnaround has restored Mr Bronfman's reputation, after his decision five years ago to sell the Bronfman family's Seagram empire to Vivendi Universal of France, for US$34bn, in an all-stock deal.

The Bronfmans lost billions of dollars as Vivendi came close to collapse.

- INDEPENDENT