Warner approaches EMI again, Indies back tie-up

Kate Holton

LONDON: Warner Music Group has approached Britain's EMI about a possible bid despite uncertainty over whether it would win regulatory approval, in the latest twist in a seven-year tit-for-tat takeover battle.

Warner said it saw a strategic, commercial and financial logic to a deal and had made the move after gaining the support of Impala, the trade group for independent music labels which has previously challenged consolidation in the industry.

EMI said there was currently no proposal for the board to consider and no certainty that there would be one, but its shares still rose 8.4 percent to close at 240 pence. Warner's shares were up 6.1 percent at $19.37.

Analysts had speculated that EMI, the world's third largest music company and home to Robbie Williams and Coldplay, could receive a fresh takeover approach after it last week issued its second profit warning in just five weeks.

Warner, the fourth largest music company, has also struggled recently, reporting a 74 percent drop in quarterly profit due to its artists having fewer hits, and any tie-up would give both sides access to more music and the ability to cut costs.

It would also help solve EMI's historical problem of having the smallest market share out of the four music majors in the United States, the world's largest music market.

But any fresh attempt could run into the same regulatory problems that have hindered previous efforts.

"The regulatory outlook is still very uncertain," said Numis Securities analyst Richard Hitchcock. "But given how difficult the trading environment is -- U.S. physical sales are down 20 percent in the year to date -- they (Warner Music) will no doubt argue that the case for consolidation has been strengthened."

Analysts said any bid was likely to be pitched around 260 pence a share. Warner offered 320p a share for EMI last year.

TIT FOR TAT

EMI and Warner Music first tried to merge in 2000 and again in 2003. Last year, they were locked in a $4.6 billion battle to buy each other, but hopes of a deal were quashed in June when a European court annulled approval of the 2004 merger of Sony Corp's Sony Music and Bertelsmann's BMG.

That ruling cast doubt on whether EMI and Warner Music would get regulatory clearance, and the companies abandoned talks until there was more clarity from antitrust regulators.

The European Commission is now examining the refiled Sony-BMG bid, which would create the world's number two music company, with a deadline of March 1 and it is then expected to open a further investigation that would last 90 working days.

Impala, which brought the Sony-BMG legal challenge, said it had an understanding with Warner that Impala would support any Warner-EMI deal in return for support for the independent sector.

"WMG believes that the agreement reached with Impala and the measures envisaged under it ... improves the prospects for regulatory approval," Warner said.

Impala said that under the deal, a combined Warner EMI would, for example, give financial support to such groups as Merlin, the newly launched agency which works to secure licensing deals for independent labels.

Analysts said the Impala deal was a clever move on Warner's behalf to silence a vocal critic but it did not change the fundamental problem of consolidation in the industry.

The music industry has struggled in recent years as the growth in legal downloading has not made up for the slide in physical sales but EMI has been hit particularly hard, with the poor performance of new releases such as Williams's "Rudebox".

In response, all groups have looked to grow their digital revenues. Barney Wragg, the former senior vice president of Universal music's digital division, told Reuters recently he had joined EMI because it was so focused on its digital business.

But according to analysts at Jupiter, it has some way to go as Universal, the world's number one music company, has been the most successful at expanding its digital business, ahead of Sony BMG in second, Warner in third and EMI in fourth.

EMI said it would consider any proposal with "a particular focus on conditionality, the regulatory and operational risk profile, and on valuation in relation to the company's standalone value and the value creation available from a combination".

(additional reporting by Mark Potter)