EMI and Warner Music "should merge"

The saga must rank as one of the longest-running, most inconclusive, takeovers in corporate history, writes The Telegraph today.

It has emerged that EMI-owner Terra Firma met with Edgar Bronfman, Warner's chief executive, several times last year, but talks on a deal ran aground yet again over price and the two have not met since. "There are £1.6bn in value terms of synergies out of any such merger but neither side could agree who should get the benefit of those synergies so that deal fell apart," said one source of what is at least the fifth time the pair have looked likely to link up only to fail to do so.

Mr Hands' EMI may have taken writedowns and amassed a large debt pile but Terra Firma is still the proud owner of the company behind Coldplay's Viva la Vida, last year's best-seller. You would be unlikely to see such passion in other less glamorous sectors, such as mining or chemicals.

While EMI has been under different ownerships in the past decade, the curse of running a music company – where passion often gets in the way of sense – has surely played a role in some of the failed marriage attempts.

The Terra Firma chief, Guy Hands, may be a shrewd businessman, but even the private equity player has been unable to dodge some of problems associated with owning a record label. As a music lover he is enjoying the experience. Watching him dancing and singing at a recent Lily Allen gig alongside colleagues and family provided some insight.

Mr Hands believes that Terra Firma's EMI under marketer Elio Leoni-Sceti has had clever ideas. In many ways, Terra Firma is right to have some faith. EMI did report a threefold increase in earnings to £163m in the year to March, boosted by the Coldplay album. And Mr Leoni-Sceti is undoubtedly having the right ideas – from deals with video-games makers and music websites Spotify and Muzu.tv, to selling the rights from lyrics of classic songs, including Radio Ga Ga and Somewhere Over the Rainbow, to Sainsbury's for a range of baby clothes.

However, there is only so much he can do. EMI – and Warner – would benefit greatly from increased scale. According to the latest Informa figures, EMI held the smallest recorded music market share of the major companies, with its slice of sales falling from 9.9pc in 2007 to 9.6pc in 2008. Universal increased its revenue market share to 28.7pc from 28.1pc in 2007, Sony BMG followed with 21.1pc and Warner Music's share was 14.9pc.

EMI Music Publishing also lost the top spot in music publishing, been beaten into second place by Universal with a share of 18.3pc.

Scale matters in the music industry. No more is it just a question of keeping up with Universal and Sony BMG, size is necessary to prove that, in the world of MySpace and YouTube, the record label model still works.

Scale would also give EMI and Warner Music greater strength in negotiations – particularly after Warner Music's recent scuffle with YouTube, where the label demanded that thousands of its videos from artists be taken down.

The financial pressures on EMI are clear. It emerged last week that a further £28m has been injected into Maltby Capital, EMI's holding company, to keep it within the terms of its debt agreement. Terra Firma acquired EMI in 2007 with £2.6bn of finance provided by Citigroup. The large debt load is no doubt one barrier to a tie-up. In March, Terra Firma's accounts showed it had taken a €1.3bn (£1.2bn) writedown on EMI – half of what it paid for the company.

Debt at Warner has also become less of an issue. It is raising $1.1bn (£670m) through a bond sale, which it plans to use along with cash reserves to pay off its bank debt. Some industry analysts believe that Mr Bronfman knows a deal makes sense and has been judiciously managing his label's balance sheet to move on EMI in anticipation of it eventually collapsing under its debt.

The financial complexities of any deal between the pair are clear – not to mention the challenges that would arise from the characters involved in negotiating on both sides. It is, after all, not clear who would buy who in a merger, or who would run the joint entity.

Nevertheless, EMI and Warner Music should try to find a way round their differences. It is no secret the music industry has changed. Regulation is unlikely to prove problematic this time around and the growing force of the internet means the record labels must band together to combat it. While the music industry does work together to some extent, another large player would create a much-needed force at a time when many are questioning the viability of labels.