EMI Could Get Snared In Catch 22

Although EMI is fully expected to return with a raised bid for Warner Music, each new approach from the British music company is likely to push its U.S. rival’s share price even higher.

After having a US$28.50 per share bid rejected, most U.K. business analysts are expecting EMI chairman Eric Nicoli to return to the table offering US$30 – valuing Warner at about US$4.5 billion – despite murmurings from some of his company’s major institutional shareholders.

Many Wall Street bankers are saying it still won’t be enough and that the Warner board may hang out for US$33 dollars per share, The Observer reported.

That could be unacceptable to some of EMI’s London-based shareholders, who are said to be nervous that Nicoli and chief executive Alain Levy could overpay for Warner.

They’re concerned that a gap has opened up between the two sides about the level of cost savings that could be extracted after a merger.

EMI is understood to be banking on at least US$200 million, but Warner is pitching the figure at about double that.

The extent of the cost savings is critical, as much of Warner’s stock price rise has been fuelled by speculation about a merger with the U.K. company.

Based on share price alone, Warner is overvalued and its stock might fall sharply if EMI was to go cold on the deal.

Warner chief exec Edgar Bronfman Jr. and private equity investors including Thomas H. Lee Partners, Bain Capital and Providence Equity Partners – which collectively own about 75 percent of the U.S. company’s stock – will be hard put to find another bidder offering such a huge premium on the US$2.6 billion they paid for Warner a couple of years ago.

To avoid over-gearing EMI’s balance sheet or forcing it to raise funds via a rights issue, the merged group could sell one of the two massive publishing companies it would then own. The U.S. and European monopolies commissions would certainly insist upon this.

Either would be valued at about US$1 billion.

— John Gammon