A couple of old dance partners are back at it. After years of engaging in on-again, off-again merger discussions, EMI Group made a fresh overture on May 2 to the Warner Music Group (WMG). The offer: $28.50 in cash and stock to take control of the company that has been headed by Edgar Bronfman Jr. since early 2004. Just as quickly as the offer came in, the board of Warner Music, which is no longer affiliated with Time Warner (TWX), rejected it.

But the drama is far from over. Warner Music's move may have only set the stage for what could be a long dalliance between music moguls. Given this new twist, just imagine for a moment that you are Jonathan Nelson, the CEO and founder of Providence Equity Partners, one of Bronfman's backers at Warner Music.

Nelson wouldn't comment on Wednesday. But with a dizzying number of possible outcomes to this saga, it's worth looking at the possibilities from his perspective to contemplate what he might be thinking in light of EMI's surprise bid. Let's get inside his head.


  For one, you're surely thinking, "Hey, investing in music wasn't such a bad thing. Somebody wants to offer me a big chunk of change. I must be a pretty smart guy." But, wait, you and the other private equity backers at Warner, including Thomas H. Lee Partners and Bain Capital, got your initial investment back -- about $350 million -- a long time ago, in October, 2004. That was even before Warner Music's IPO last May. You're really not under any great pressure to jump at the first offer.

So you and your fellow members of the Warner Music Board of Directors reject London-based EMI's offer. You especially like the line in the press release that says the proposal "is not in the best interests of our shareholders." That will show them. You can afford to put on the poker face. And since you and your private equity guys control about 75% of the Warner stock, you know EMI won't make it a hostile bid.

As an investor, you are also fully aware that Warner Music is prepared to announce its quarterly earnings on May 5. Nobody wants to go to jail, so not a peep is being whispered about how the numbers will look. But there has been buzz that the financials could beat Wall Street's expectations with robust digital sales. If that's the case, you know that will certainly give your stock a nice pop. Shares are trading at about $28, up dramatically from the IPO price of $17. "Hey, wait a minute. Isn't EMI's offer roughly the current trading price with no premium? What's up with that?"


  So the Brits have the weekend to mull over the next move, which will likely be a sweetened offer. Maybe even $30 with more cash than stock thrown into the equation. Now that's sounding pretty good. And deep down you know the merger of Warner and EMI makes a lot of sense. EMI is very strong in Europe and Japan. Warner has a strong U.S. roster. What a lineup, between EMI's Rolling Stones, Coldplay, and Nora Jones; and Warner's Red Hot Chili Peppers, James Blunt, and Sean Paul.

And even though your man Edgar and his team have cut hundreds of millions of dollars in costs at Warner already, you are confident that a combined EMI-Warner could find even more cost savings, especially in eliminating one of the two big offices in New York.

What's more, you're happy with your publishing business Warner-Chappell, but you'd be much happier having EMI's publishing business under your hood -- the gold standard in the industry. Regulators would never allow the two biggest music publishing businesses to be combined, so you resign yourself to putting Warner-Chappell on the block.

If EMI is going to give you stock, you know you will still have a stake in the music business, whose future is still uncertain. That makes you a bit nervous. You remind yourself you are private equity, typically in for five years or less. A short-timer. But you've liked what you've seen so far.

Providence owns 13 million shares of Warner. So your investment has gone from $221 million in value to $364 million in a year. Not too shabby. And as rough as the transition may be from physical music sales to digital, the cost savings from EMI-Warner will offer you some protection through the bad patches.


  Then you pause for a second and think to yourself. "Does it make more sense for Warner to be the buyer?" If you are going to double-down on your bet in music, why not do it in a way where your guy, Warner CEO Edgar Bronfman, is calling the shots at the new company?

You remember that Edgar put together two giants before, Universal and Polygram, to create what is today the juggernaut of the business, Universal Music Group. Besides, you and your private equity pals are awash in cash these days. You could muster a bid of your own, especially with EMI's stock trading at the equivalent of $5 a share. That's a market cap of $4 billion.

Maybe that strategy is something to discuss, but you don't want to get ahead of yourself. As Richard Greenfield, an analyst with Pali Research, speculates about EMI: "Let's not forget that this not the first and final offer." So you tell yourself to be patient and wait for the Brits to make their move.

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