WMG and EMI: Who Plays Lead?

Investors are eager for a merger. Trouble is, their CEOs can't get beyond who will be king of the castle

After more than six years of playing footsie with each other, Warner Music Group (WMG) and EMI Group are at it again. On June 28, both companies issued public statements explaining that each had made an acquisition offer for the other and had been rejected.

EMI claims to have made a follow-up bid to its May 3 offer first, proposing on June 23 that it buy the U.S.music company for $4.6 billion. On June 27, Warner Music rejected the bid and made its own offer to buy the British company for the same amount. When both went public with their version of events the next day, EMI called the proposal “wholly unacceptable.”

Are the talks permanently bogged down? Maybe not. Both companies clearly believe that it makes sense to combine their operations. Regulators are unlikely to stand in the way of a deal this time, as they did in 2000, when the two companies tried to combine. There also don't appear to be any significant strategic disagreements.

BATTLE OF WILLS.

  Instead, the most significant snag is over who will control what would become the world's second-largest music company, trailing only Universal Music Group (V) in market share. Even though both companies have offered cash premiums to buy each other, EMI Chairman Eric Nicoli and Warner Music Chairman Edgar Bronfman Jr. aren't budging. While the two executives may have similar convictions about the importance of digital to music's future and both have made the hard decisions to streamline their companies—EMI has cut $300 million in costs and Warner $250 million—the two men couldn't be more different. Nicoli is a Brit who served as CEO of United Biscuits before getting into the music business. Seen as a serious bean-counter, Nicoli can often be, well, as dry as a cracker, say some music industry executives.

Bronfman, on other hand, is the Canadian-born heir to the Seagram booze dynasty, a man who still fancies himself to be not just a manager but a member of the music-industry club. (He even writes his own songs.) Neither man appears willing to give up his current station, creating a situation that sooner or later could dampen enthusiasm for a potential merger that has British and American investors excited.

Both EMI and Warner, oddly enough as bidders, have takeover premiums built into their stocks. On June 28, when the news of the bids and counter-bids surfaced, Warner's stock closed up 88 cents, at $28.11, while EMI, trading on the London Exchange, closed up 23.75 pence, at $307.50 pence.

STALEMATE.

 But Merrill Lynch (MER) media analyst Jessica Reif Cohen warned in a report released on June 28 that if bids escalate, the companies may be "eroding the value of synergies through higher financing costs." She added, "Management control remains a major roadblock to getting this transaction done, despite the combination making financial sense." EMI and Warner declined to comment beyond the prepared statements in which each argued that its offer was more attractive to the other company's shareholders. Warner Music, for instance, said its proposed deal "will provide shareholders of both companies with a superior opportunity to realize significant value in their shareholdings."

Nobody wants a forced compromise that would blend the top managements of the two companies. One scenario might be that Nicoli takes the role of chairman and Bronfman becomes CEO. These companies need to look no further than the industry's last big deal, the joint venture between Sony Music and BMG that led to internecine warfare and put Sony (SNE) executive Andy Lack at loggerheads with BMG boss Rolf Schmidt-Holz over turf issues.

What might be most telling about the stands being taken by executives at EMI and Warner is that just three years ago, facing a loss of one-third of the industry sales and continued threats from piracy, any music executive must surely have pondered a way to quickly exit the business. Now, Nicoli and Bronfman, who could easily go away with their own success stories to tell, look like they actually want to stick around to see how it all plays out.