Analysts Cutting Over EMI Hopes For Warner

At the beginning of this month EMI launched another attempt at marrying its business with US music rival Warner Music Group in a bid to compete on an equal footing with the likes of Sony-BMG and Universal.

But EMI’s $28.50 a share offer, funded through a mixture of cash and paper, was rebuffed by its US target. This follows three previous unsuccessful attempts to bring the two companies together, which have foundered on regulatory obstacles.

Many observers expect EMI to return with a higher offer, possibly around the $30 mark, which would value Warner at $5bn and EMI’s final results on Tuesday will be closely watched for any hint of more corporate action. Under Eric Nicoli, EMI has dragged itself back from the dark days of 2003 when its share price dipped as low as 80p. It recently posted a four-year high of 294p before a little profit-taking took it back to around the 275p level, which values the company at £2.2bn.

In a global music industry where the larger players have become ever more dominant, the potential clout of a merged EMI and Warner would be considerable, not to mention the synergies bringing the two together could generate. EMI itself reckons it could deliver £300-£400m in savings. But so far this argument has failed to convince Warner boss Edgar Bronfman Jr and his private equity backers.

Bronfman himself appears cool towards the idea, recently telling investors: “Consolidation for consolidation’s sake doesn’t make a lot of sense. Ours is not a business that requires scale economics.” Warner’s sales in the opening quarter of the year rose by 4% and download sales doubled.

Deutsche Bank analyst Douglas Mitchelson even questioned whether it should actually be Warner doing the acquiring of EMI rather than vice versa. But EMI itself is performing solidly, aided by hit albums from the likes of Coldplay and Gorillaz in the past year and consensus estimates point to a full-year profit of £158m this year, up from £107m in 2005.

Despite this, the analyst community has remained somewhat underwhelmed by EMI’s prospects with Bridgewell Securities, with an overweight rating, one of the few to be positive.

Lehman Brothers recently reiterated its underweight recommendation saying: “The stock remains fairly full on a stand-alone basis while the Warner rebuff implies a higher price or no near-term deal. We are still not sure the two groups will be able to agree a deal.”

Analyst Richard Jones of Lehman does not think an EMI/Warner combination would fall foul of regulatory problems again because its combined 25% share of the market would only match that of Universal and Sony-BMG although the EU could force it to sell off some publishing assets. But Jones believes neither board would be keen to step down in favour of the other and this may scupper any deal.

Source: thebusinessonline.com