Warner Music investors test water on failed EMI merger

A private equity firm that part owns America’s Warner Music has held preliminary talks with advisers to EMI about resurrecting last summer’s failed bids.

The recent talks – opened without Warner’s authority – were prompted by interest from rival Permira, which is widely expected to make a 320p bid shortly.

Warner, which floated on the New York Stock Exchange in May last year, is still part owned by Bain Capital, Thomas H Lee, Providence Equity Partners and chairman Edgar Bronfman’s investment vehicle. A source familiar with the situation said the informal approach by an unnamed firm was made to “see how the land lay”.

It is believed competition concerns need not pose the same barrier as previously thought. Talks over the summer stopped abruptly when the European Commission rebuffed the 2004 merger of Sony Music-BMG over competition.

Merger discussions between EMI, the world’s third largest music group and Warner have been on and off since 2000. Before the Commission’s shock announcement this year, the two had made bids and counterbids, and were arguing over price. EMI had said a £2.52bn offer from Warner was too small to be taken seriously. EMI is advised by Deutsche Bank, Citigroup and Greenhill while Warner, the world’s fourth largest record company, uses Lehman Brothers.

In September, Bronfman was optimistic that a deal with EMI would be compliant with European regulation. The Commission has yet to deliver its final ruling on the Sony/BMG merger, which is why the EMI/Warner merger talks had been put on hold.

The new approach from one of Warner’s shareholders was prompted because a successful bid from Permira would put a Warner/EMI combination out of the picture for at least three years, unless the recorded music business was sold on separately. The logic for a deal is compelling. Combining the recorded music operations of the two businesses would generate substantial savings.

A deal with private equity would lack such benefits but dodge regulatory problems. EMI consists of EMI Music, whose labels include Capitol Records, Angel Records and Virgin Records, and EMI Music Publishing. The music publishing business is the world’s largest and EMI Music’s roster of artists includes Robbie Williams and Norah Jones, both set to be big earners over Christmas, along with Coldplay. Warner also has a substantial music publishing business. Its artists range from Madonna to James Blunt.