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EMI’s merger bid tuned out

WMG feels no urge to merge

This story was updated at 6:21 p.m.

LONDON — EMI wants to play, but Warner Music is playing hard-to-get.

In the latest chapter of the merger that won’t die, Warner Music Group has rejected EMI Group’s proposal to acquire the music company for about $4.2 billion.

U.K.-based EMI offered WMG $28.50 per share for all of its outstanding shares Monday. EMI Group chairman Eric Nicoli made the offer directly to Warner Music chairman Edgar Bronfman.

The Warner Music board rejected the offer within 24 hours, tersely explaining in a statement released around 4 a.m. ET Wednesday, “The board has determined that the proposal is not in the best interests of our shareholders and has unanimously rejected it.”

Insiders said Warner had not ruled out the deal but was simply holding out for a better offer, possibly one as high as $30 per share. While EMI’s offer priced shares at an 18% premium over WMG’s $27 Monday opening price, diskery may believe it could snag a better price given the companies’ relative positions. WMG has had a stellar year since it began trading as a separate company a year ago, while EMI has struggled on the London market.

Private interests control 75% of WMG’s stock, which means the company probably isn’t worried about a hostile takeover. Music industry observers also noted WMG may have rejected the offer because it still believed the acquisition could go the other way, with WMG acquiring EMI.

The offer did not spring from any negotiations between the two companies and there are no talks ongoing.

Even though EMI is the far larger company, Bronfman has a precedent for buying, and integrating, a larger record company; he essentially did that when his Seagram Universal bought Polygram in the late 1990s.

A deal in that direction would also give Bronfman a far larger role at the combined company, but it is not clear what sort of management structure the merged company would create.

Bronfman may be skeptical of selling to a large European company, given his last major move of this kind — the Seagram sale to Vivendi in 2000 — yielded some unfavorable results.

Meanwhile, EMI seemed to signal it was resisting a WMG acquisition when it released a statement that said, “The board of EMI continues to believe that an acquisition of Warner Music by EMI would be very attractive to both sets of shareholders. (Company) will only pursue a transaction that delivers enhanced value and earnings accretion to EMI shareholders.”

Merrill Lynch analyst Jessica Reif Cohen implied the deal was a sweet one for WMG — and one it should take seriously — when she wrote in a note that the offer showed EMI’s valuation of WMG was “very rich” and said, “It is not clear that a revised bid is coming.”

Still, Wall Street appeared to like the rejection, sending WMG’s stock up 71¢ from its Tuesday close of $27.29 to close Wednesday at $28.

“The offer was rejected quickly because there’s no reason for a stockholder to take $28.50 when they already have $28,” said L.A. music attorney Chris Castle, who has represented major labels as well as Internet companies involved in music distribution. “It may just be an opening bid, but it doesn’t make sense for Warners to accept an offer like that now. They’re generating hit records, they have good executives internationally and a good management team in place. They’re breaking acts, rejuvenating acts … and breaking ground digitally.”

EMI’s offer comes at a time when Warner Music is looking particularly healthy in the sales department. For the year, WMG has an overall market share of 17.2% while EMI is at 9.2%.

This week, WMG has six of the 18 bestselling albums in the U.S., a mixture of established acts such as the Goo Goo Dolls, growing bands like Taking Back Sunday and rookie Daniel Powter. Conversely, EMI has only two albums in the top 50 and both of those are more than a year old and hail from country acts.

The particulars of the deal haven’t been disclosed, but it likely would not include the Warner Chappell Music Publishing side of the business.

EMI Music Publishing remains the dominant company in that sector globally, but with Warner Chappell running a close second, it would be very unlikely that the competition watchdogs of the European Commission and the U.S. Securities and Exchange Commission would allow those entities to unite.

However, if EMI pursues its interest, those competition regulators could be more receptive to the marriage of the record company businesses this time around. The music groups first attempted a merger in 2000, only to have it rejected by the EU Commission. Talks were held in 2003, but Bronfman and his team of investors swooped in to purchase Warner Music from Time Warner for $2.6 billion.

Warner Music labels include Warner Bros., Reprise, Atlantic, Elektra and Nonesuch and include artists such as Green Day, Madonna and James Blunt. EMI’s portfolio includes Capitol, Blue Note and Virgin with artists such as Coldplay, Norah Jones and the Rolling Stones.

(Gordon Masson in London contributed to this report.)

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