EMI, Warner postpone merger over EU ruling

EMI and Warner Music Group faced the music yesterday as the two groups admitted they would have to end their attempts to consummate a deal after the unexpected review of the Sony BMG merger by European regulators.

A decision by a European court earlier this month to annul the decision that led to the creation of Sony BMG two years ago had put into question a possible merger between the UK and US music groups.

Despite the judgment, EMI, under the chairmanship of Eric Nicoli, at its annual meeting earlier this month reiterated its interested in pursuing the merger.

However, the UK group, which bid $31 (€24) per share in its latest offer for Warner in June, said yesterday that it had decided "not to pursue a combination with Warner Music for the time being". Warner, which had made a counter bid at 320p a share, also announced it did not believe "it would be prudent to pursue" a transaction.

For the UK group, it is the third time its pursuit of Warner has been frustrated, which would normally be fatal for a company's management.

However, as the share price movements indicated yesterday - EMI fell ¾p to 261p - shareholders and analysts remained sanguine as they saw the European decision as something out of management's control and that both sides would attempt to revive the talks if regulators eventually approve the Sony BMG merger.

"This has nothing to do with the management. You can't blame them," said one large EMI shareholder. The general view in the City is that the combination still makes sense, and the merger is just put on hold. "An EMI/Warner merger is such a compelling scenario. The European decision doesn't remove the fact that this combination is still the best option," said one source.

There was also optimism among some investment bankers that the Commission would eventually approve the Sony BMG combination.

"The issue is whether the European court had questioned the process of the fundamental judgment of allowing the transaction through. If it's a process point then you're back to where you were," said one.

A decision by European authorities is expected to take six to 12 months, and for now, both EMI and Warner said they would focus on their operations.

EMI yesterday said it would "deliver strong operating performance" this financial year. It will have a strong line-up of releases this year, including a new Beatles compilation, and album releases from Norah Jones, Robbie Williams and KT Tunstall. While some shareholders have questions over the personalities of the management team, most are satisfied with their operational achievements.

Simon Wallis, analyst at Collin Stewart, said he was "happy with EMI's fundamentals", and forecast a 2.5 per cent growth in revenues in the current year to March 2007. He added that recovery was supported by improving digital sales, a cross-industry effort against piracy, and EMI's investment in A&R.

Investors will also be focused on Warner's third-quarter results on August 3rd. Analysts are forecasting revenues of $794 million and operating income before depreciation and amortisation of $82 million. They expect Warner to beat estimates because of "the recent Red Hot Chili Peppers and Madonna releases and continued digital momentum".