Takeover offer success depends on regulators

Warner Music is again kicking the tires at EMI, but this time the American company has the support of the European indie coalition that has fought every music industry merger.

There is no proposal on the table from Warner Music, nor is the EMI board certain one will be forthcoming. The latest maneuver marks seven years of courtship between the two music companies.

Warner Music Group approached EMI on Jan. 24 after it forged an agreement with the Independent Music Publishers and Labels Assn. (Impala) under which the latter would support WMG before the European Commission and other regulatory bodies.

Impala and WMG agreed to a list of actions that would follow any offer Warner Music would make within the U.K. Takeover Code. To secure Impala’s OK, WMG would help fund Merlin, a new global digital rights licensing platform; ensure the divestiture of certain recorded music assets; and pursue other “behavioral commitments” with the aim of benefiting the indie music world.

In a statement, Warner Music said, “Setting a new framework for the relationship between a combined WMG and EMI and the independent music sector, which is designed to enhance competition across the industry, improves the prospects for regulatory approval of a combination of WMG and EMI.”

There was considerable speculation last week that EMI would become a takeover target after it issued its second profit warning in just five weeks. Warner, too, had a troublesome quarter, reporting a 74% drop in profit. Both companies, which have successful, income-producing music publishing arms, placed the blame on a lack of hit records.

If EMI were to accept a Warner deal, the transaction would once again require the approval of competition regulators in Washington and Brussels. The EU is already re-examining the 2004 merger of Sony Music and BMG, which the European Court annulled last year after Impala raised a number of issues. Once the Sony-BMG merger was put back into discussion, Warner and EMI put an end to their last attempt at a union.

In London trading on Tuesday, EMI’s shares rose 13%, giving the company a market value of £1.9 billion ($3.71 billion). One-day gain was its biggest in almost three months; EMI’s share price took a hammering last week, when it announced its second profit warning.

In mid-January, EMI began enacting a plan to provide about $215 million in incremental annual cost savings. Two top execs were let go and the company began to lay off about 6% of its staff.

The day after Warner Music’s approach, less than two weeks after the announcement of the cost-saving plan, EMI merged its Virgin and Capitol labels and put the entire operation into the hands of Jason Flom. EMI Group chairman Eric Nicoli, who has held his job since 1999, has weathered takeover talk for nearly his entire tenure. But cracks are starting to show.

Over the weekend, word leaked that EMI is considering borrowing $1.8 billion, using its publishing biz as collateral, to help salvage the recorded music end. In addition, a hedge fund shareholder, Eclectica Asset Management, reported that it has asked EMI to sell its recorded music division, claiming disappointment with the management team.

Warner Music Group owns labels including Warner Bros., Reprise, Atlantic and Nonesuch; EMI has Capitol, Virgin, Blue Note and Manhattan. Recently, EMI has been exploring the selling of downloads without Digital Rights Management software that prevents copying — a move that has received a mixed reaction in the music and digital industries. WMG has been steadfast in its support of DRM software.

(Gordon Masson in London contributed to this report.)

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