EMI Confirms Warner Music Takeover Offer

By | February 20, 2007 at 2:30 PM

Struggling music company EMI Group PLC, beset by profit warnings and an accounting scandal in Brazil, was thrown a potential lifeline Tuesday with a possible new takeover bid by former suitor Warner Music Group.

A tie-up would bring a badly needed infusion of top U.S. artists including Madonna and the Red Hot Chili Peppers to London-based EMI – whose Beatles remix album has dropped off Billboard’s top 40 and whose great hope for cross-Atlantic appeal, Robbie Williams, has drawn more publicity for rehab than music.

EMI confirmed Tuesday it had been approached by Warner, but that it has received no specific proposal to assess.

“A deal would be a no-brainer,” said Richard Hunter, an industry analyst for Hargreaves Lansdown Stockbrokers, estimating about 350 million pounds ($680 million) in initial cost savings and synergies.

Shares of both companies rose amid the news.

EMI, whose book includes Norah Jones, Coldplay, Kylie Minogue and the Beatles back catalog, jumped more than 8 percent to 240 pence ($4.69) per share on the London Stock Exchange. Warner Music rose 6 percent, gaining $1.09 to $19.34 in afternoon trading on the New York Stock Exchange.

EMI and Warner discussed a $4.6 billion deal last year, but abandoned the effort when a European Court ruling scuttled another industry merger planned between the music units of Sony Corp (NYSE:SNE – news). and Bertelsmann AG.

Some analysts said New York-based Warner’s decision to make a fresh overture suggests growing optimism the EU will clear the Sony BMG merger in a ruling expected by March 1.

Notably, Warner said its new overture is supported by Impala, a trade association that represents independent music labels and licensing companies. Impala’s vocal opposition to prior mergers has been seen as a key influence in the tough stance taken by European antitrust authorities.

But others remained doubtful.

“The key issue within any corporate activity remains regulatory risk, following the European Court’s decision to annul the authorization of the Sony BMG merger,” said Iain Daly at Bridgewell Securities. “There is little clarity on this point and we continue to believe that this makes an EMI/Warner combination difficult to put together.”

A merged EMI and Warner Music would control about 25 percent of the global recorded music market based on sales, ranking second to Vivendi SA’s Universal Music, according to the International Federation of the Phonographic Industry.

Music companies have been looking to merge as the market for physical CDs declines rapidly, siphoned away by cheaper Internet downloads. The IFPI estimates that overall music revenue fell about 3 percent in 2006 as a doubling in online sales failed to compensate for declining CD purchases and digital piracy.

EMI has blamed the overall industry decline for its own troubles, citing disappointing North American CD sales last week when it announced its second profit warning this year.

But analysts say that the overall industry’s woes do not entirely explain EMI’s poor performance, pointing out that Warner and Universal have weathered the storm better.

They instead highlight EMI’s persistent weakness in the United States, lack of promising new tunes and internal control problems.

The company announced the departure of two top executives in January when it issued its first profit warning this year. It also unveiled a raft of cost-cutting measures as it said that Music Chief Executive Alain Levy – who was recruited five years ago to turn around the company – and Vice Chairman David Munns would be leaving the company.

The two recent profit warnings followed revelations last year of accounting fraud at EMI’s Brazilian recorded music division. The fraud inflated profits at EMI Music arm by about 9 million pounds ($17 million) while overstating revenues by about 12 million pounds ($22.5 million). The company suspended several senior Brazilian managers.

Analysts said another major problem is that EMI only captures 10 percent of the U.S. music market, the most lucrative in the world.

The company did have a U.S. No. 1 last month when it released Norah Jones’ acclaimed new album, and British singer Lily Allen is also poised for American success. But with superstars Coldplay unlikely to release a new album before the end of the year, analysts say that EMI simply does not have enough good talent on its books.

On the bright side, EMI may reap a new windfall from its Beatles catalog if it agrees to allow online sales of the Fab Four’s songs. Analysts expect such an announcement soon now that iPod maker Apple Inc. has resolved a bitter trademark dispute with Beatles’ guardian Apple Corps Ltd. over use of the apple logo and name.

Lorna Tilbian of Numis Securities said Warner may be seeking to take advantage of the recent drop in EMI’s share price after the British company terminated discussions with an unidentified suitor – widely believed to be European private equity firm Permira Advisors Ltd. – in December.

However, Collins Stewart analyst Simon Wallis said the benefits of a merger were difficult to calculate because “both businesses are suffering a structural decline.”

Warner, while performing better than EMI, has its own problems. earlier this month, it reported that its latest quarterly profit fell 74 percent due to softer sales and fewer albums being released during the period.

“While EMI management are highly vulnerable to a bid, we think that the risk-reward on these shares is unattractive and that today would be an excellent day to sell,” Wallis said. 

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