EMI and Warner Music are locked in a takeover stalemate after Warner turned the tables on its suitor and submitted two counterbids for EMI, which the British record group rejected.
Both camps were in a bullish mood last night, having thrown out bids valuing each other at £2.5bn, amid no sign of a final chapter in a corporate saga that stretches back to 2000 when EMI and Warner first attempted to combine. EMI detailed a flurry of bids and counterbids in a statement to the stock exchange yesterday after news of Warner's fightback was leaked.
Warner submitted its first counterbid a fortnight ago, triggering a revised offer from EMI that valued Warner at $31 a share, or $4.6bn (£2.5bn). Warner responded with a second counterbid on Tuesday, valuing EMI at 320p a share, or £2.5bn. EMI yesterday described its bid as "very attractive to both sets of shareholders" and dismissed the Warner offer as "wholly unacceptable".
Warner said there were "potential merits" in bringing both businesses together but insisted that a takeover of EMI was the best option for all shareholders. It added that the EMI bid carried execution risks because it would be part-funded by the sale of Warner's music publishing business and a £1bn rights issue.
One big shareholder in EMI, speaking on condition of anonymity, dismissed the Warner counterbids as "quite derisory". The shareholder added that EMI investors wanted the British group to win because there was considerable upside to an EMI/Warner combination.
"We want EMI to get Warner at somewhere around where the last bid went in. We want to participate in the upside. Alternatively, we want a fat price."
A combined EMI and Warner would control a quarter of the world record market, on a par with market leaders Sony BMG and Universal Music. Its artist roster would bring together EMI's Radiohead, Gorillaz, Coldplay and Robbie Williams, and Warner's Madonna and REM.
A merger would also give EMI a stronger presence in the world's largest record market, the United States. It is the smallest of the four majors across the Atlantic with a 9.5% share, while Warner has 15%. A deal would also bolster private equity-controlled Warner's global presence as the smallest of the major groups. Both companies would also generate savings by bringing together A&R (artist and repertoire) teams, which scout and sign up talent, and merging record labels, while offering standard merger synergies from combining back office areas. Analysts' estimates of potential savings vary from $200m to $400m.
Failure to strike a deal in the face of such a convincing rationale has raised the question of whether executive egos are getting in the way. Analysts at Credit Suisse warned yesterday that "the one outstanding risk is that egos prevail over rationality and the winning bid disproportionately favours the selling shareholders". The bank supported a deal "almost irrespective of who will be the eventual acquirer".
Either the Warner Music chairman, Edgar Bronfman Jr, or his EMI counterpart, Eric Nicoli, is expected to lead a combined EMI/Warner, depending on whose takeover bid succeeds. Insiders in both camps denied yesterday that pride was getting in the way of a tie-up: "Edgar and Eric have a very good relationship," said one source close to the talks. The EMI investor said Mr Nicoli and the EMI board were "professional" and would judge the Warner bid on its merits.
A compromise of Bronfman and Nicoli running EMI/Warner together has potential pitfalls. Sony BMG has been hobbled by internal management disputes since it was created two years ago by the merger of Sony's record business with Bertelsmann's BMG. Leadership of the company was split between the Sony appointee Andrew Lack and Bertelsmann's Michael Smellie and Rolf Schmidt-Holtz.
The rivals
Eric Nicoli, EMI
The son of Italian immigrants to the UK, the 55-year-old trained physicist spent 27 years in the food industry before joining EMI. He was made a CBE in the Queen's birthday honours last week for services to music. Last year his pay and bonus package rose 35% to £1.5m.
Edgar Bronfman Jr, Warner
After taking over the family firm, the occasional songwriter and regular of the Manhattan social scene moved Seagram into entertainment. In 2000 he sold to Vivendi for $34bn in shares. He paid $2.6bn for Warner Music in 2004. The business is now worth more than $4bn.
