Warner Music Group looks to have dropped its pursuit of EMI because the cost is too high and the risk of regulatory interference is too great.
The company’s shares fell 62 cents to $13.46 July 17th as U.K. and U.S. newspapers reported it was unlikely Warner would bid before the July 19th deadline.
WMG and the private equity groups that back it, including Bain Capital and Thomas H. Lee, appeared to be playing a game of brinkmanship. The companies hired veteran Wall Street banker Alan Mnuchin to advise on the viability of bidding at approximately 300 pence (US$6.15) per share – a 35 pence premium on the 265 pence offer from U.K. investment group Terra Firma.
Most EMI shareholders appeared to be hanging on to their stock with a market price of 269 pence per share – four pence higher than the Terra Firma bid – in hopes Warner would bid significantly higher.
A bid would have been a surprise. U.K. papers, including the Sunday Times, were doubting Bain and Thomas Lee would go through with an offer of 300 pence, generally regarded as the amount Warner would have to pay to compensate the EMI shareholders for waiting while the entire deal was subject to European Commission scrutiny.
A Warner bid for EMI would certainly have needed to be at least 10 percent higher than the Terra Firma offer because of the risk it would be blocked. The Terra Firma bid doesn’t carry that baggage and has already been given EC clearance.
Warner’s last formal bid for EMI was in February at 260 pence a share. Since then the London-based company’s trading position has deteriorated and its paper value is significantly less.
The U.K. market continues to weaken. Recent British Phonographic Industry figures show CD sales for the first half of 2007 down 10 percent, which adds up to about 6.5 million albums.
Online consumers failed to make up the shortfall as digital album sales only increased by a couple of million.
In the days leading up to the July 19th deadline, a couple of U.K. papers still hadn’t ruled out the possibility that former EMI boss Jim Fifield and his team of U.K.-based private equity backers would make an 11th-hour offer. At press time, Fitfield’s team was still silent.