Strained Courtship for EMI, Warner

The mating dance between EMI Group and Warner Music Group Corp. is again heating up, with the music giants aiming to get hitched.

If only they could agree on who should be doing the courting.

On Wednesday, Britain’s EMI rejected a $4.6-billion takeover offer from New York-based Warner Music, calling the all-cash bid “wholly unacceptable.”

That followed a decision late Tuesday by Warner to spurn EMI’s $4.6-billion offer. Warner said that its proposal provides “a superior opportunity.”

This week’s developments mark the latest in a contentious, six-year courtship aimed at creating the world’s second-biggest record label. The two came close to a deal in 2000 and have talked sporadically ever since. The latest round of negotiations intensified in early May, when EMI made a $4.2-billion bid for Warner that was rejected.

Both Warner and EMI have said a deal would help maximize efficiency in an industry beset by declining sales, plagued by illegal copying and dominated by Universal Music Group and Sony BMG, the Sony Corp.-Bertelsmann joint venture.

“One of these companies is going to take over the other,” said Laura Martin, analyst at Soleil/Fulcrum Research in Los Angeles. “There’s almost no chance they can just walk away now without doing something.”

EMI has a strong international roster with artists including Coldplay, Gorillaz, the Rolling Stones and Norah Jones, while Warner Music is best known for such U.S. artists as Green Day, the Red Hot Chili Peppers and Madonna.

If the companies were to combine, analysts project increased annual cash flow of $200 million to $300 million once overlapping bureaucracies and executives are eliminated.

The added size also would give the companies more muscle to negotiate with artists and retailers. A combined EMI and Warner Music, a distant third and fourth in global sales now, would account for 26.4% of the song market, making it the world’s second-largest music seller behind Universal.

Combining, analysts said, would help both companies cope with the music industry’s continuing sluggishness. Worldwide sales slipped 3% last year, to $33 billion, as people bought fewer CDs amid a rise in illegal copying, according to the International Federation of the Phonographic Industry in London.

Warner’s market value has soared since Chairman Edgar Bronfman Jr. and an investor group including Thomas H. Lee Partners and Bain Capital bought the company for $2.6 billion in 2003. The group took the company public last year, selling shares at $17 apiece.

Analysts said Warner could end up winning the bidding war if the group backing Bronfman is serious about increasing its exposure to the beleaguered music business. Working in Warner’s favor are its deep pockets and EMI’s heavier debt load.

However, they said Warner’s backers could simply be playing hardball to drive up the price before selling out.

Stock traders bid up shares of both companies Wednesday.

Warner Music rose 88 cents to $28.11. EMI surged to a four-year high in London, while its U.S.-traded shares jumped $1.20 to $11.45.