EMI's $4.23 Bln Offer to Buy Warner Music Rejected
By: Administrative Account | Source: Bloomberg
May 3, 2006 6:32AM EST

May 3 (Bloomberg) -- EMI Group Plc, the world's third-largest music company, offered to buy Warner Music Group Corp. for $4.23 billion, which was rejected. EMI shares fell. EMI made the approach May 1 to buy each share of Warner Music, the fourth-largest music company, for $28.50 in cash and EMI shares, London-based EMI said today in a PR Newswire statement. Warner ``informed EMI that it did not wish to enter into discussions regarding EMI's proposal,'' the company said. The companies tried and failed to merge in 2000 after regulators rejected the plan. The music industry has been consolidating as compact disc sales fall because of piracy and other forms of entertainment, and digital music sales haven't yet made up for the drop. A merger would combine EMI acts Coldplay and Joss Stone with New York-based Warner's James Blunt and Madonna. ``Today's announcement highlights the difficulties in putting together such a deal, particularly with respect to valuation and management,'' Lorna Tilbian of Numis Securities said in a note. ``If Warner is holding out for a higher price, this raises the risk that EMI could overpay.'' The market value of Warner Music, bought two years ago by an group led by Edgar Bronfman Jr. and partly sold to the public last year, is $4.05 billion based on yesterday's closing price. EMI shares fell by as much as 13.75 pence, or 4.9 percent, to 268.25 pence, and traded at 274.5 pence at 10:43 a.m. in London. `Carefully Evaluated' Warner Music received a ``preliminary non-binding proposal from EMI,'' it said in an e-mailed release. The board ``carefully evaluated'' the offer with its outside legal and financial advisers, and ``determined that the proposal is not in the best interests of our shareholders and has unanimously rejected it.'' EMI said its board ``continues to believe that an acquisition of Warner Music by EMI would be very attractive to both sets of shareholders.'' Vivendi SA's Universal Music Group is the world's largest, followed by Sony BMG Music Entertainment, a joint venture between Japan's Sony Corp. and Germany's Bertelsmann AG. An EMI-Warner deal would create the world's No. 2 player, based on market-share data from the International Federation of the Phonographic Industry. Universal had a 25.5 percent share, Sony BMG had 21.5 percent, EMI was at 13.4 percent and Warner had 11.3 percent, based on statistics published in August. Warner's rejection of EMI's offer ``is disappointing as we believe the logic for combining the two businesses is compelling,'' Tilbian at Numis said. ``We estimate that an EMI- Warner combination would potentially yield savings of 100 million pounds,'' creating value of 70 pence per share for EMI shareholders assuming EMI got half the savings. Gorillaz and Red Hot Chili Peppers EMI has long been strong in Britain, with acts such as Gorillaz and the Rolling Stones, while Warner is known for U.S. acts including Green Day and the Red Hot Chili Peppers. In the U.S. last year, Warner had a 17.3 percent market share to EMI's 10.4 percent, according to Nielsen Soundscan, a unit of Dutch media company VNU NA. Globally, Coldplay's ``X&Y'' album was the top seller last year, with 8.3 million copies. Warner Music was bought two years ago for $2.6 billion by an investor group led by Bronfman after Time Warner Inc. decided to sell it to reduce debt. The company sold shares in a May 2005 initial public offering at $17, and shares have since risen 61 percent before today. The company has cut more than 1,000 jobs and reorganized its Atlantic Records label to save money. EMI sought to buy Warner Music at the time. Time Warner instead opted for the sale to the investor group, which carried fewer regulatory hurdles and allowed for a quicker transaction. Regulatory Climate The regulatory climate has changed since the first EMI-Warner merger attempt, after officials approved the 2004 deal to create Sony BMG. Any new EMI-Warner deal is still expected to be ``tested rigorously'' by regulators, EMI Chairman Eric Nicoli said in an interview in January at the Midem music-industry conference in Cannes, France. ``The world has changed, the regulatory climate has changed, but there's very little reason to think that any deal wouldn't be tested rigorously,'' he said. ``The industrial logic of consolidation in any industry is well understood.'' Any EMI-Warner deal may result in a divestment of the group's music-publishing activities to meet regulatory concerns, say analysts including Ian Whittaker at UBS AG. ``EMI and Warner own the numbers one and two music publishing assets, and any merged entity will dwarf its competitors,'' he said in an April 27 research note. Regarding recorded music, ``the regulatory authorities are likely to allow the merger to go through, partly given the current softness of the recorded music market,'' the note said.

To contact the reporter on this story: Charles Goldsmith in London at cgoldsmith3@bloomberg.net. Last Updated: May 3, 2006 05:45 EDT