EMI Says It Recieved An Approach From Warner Music (3rd Update)

EMI Group Plc, the U.K. music company that cut its forecasts twice in the past month, received a takeover approach from Warner Music Group Corp. in the second attempt at a merger in a year.

There is ``no proposal currently for the EMI board to consider,'' the company said today in a statement. Shares of EMI had their biggest gain in almost three months, valuing the London-based company at about 1.9 billion pounds ($3.7 billion).

Music revenue at EMI and Warner slumped in the past year after piracy eroded the market for compact discs and releases by Robbie Williams and Josh Gruban had disappointing sales. Warner and EMI abandoned efforts to buy each other in July on concern a combination would be blocked by European Union regulators.

``Warner looks increasingly like the natural home for EMI,'' Lorna Tilbian, an analyst at Numis Securities, said in an e-mailed research note. ``It would be much less risky'' for Warner to bid after the EU finishes a review of the merger that created Sony BMG Music Entertainment, she said.

Shares of EMI jumped as much as 20.25 pence, or 9.1 percent, to 241.75 pence, and traded at 237.25 pence at 9:24 a.m. in London. Before today the stock had declined 16 percent this year. In December, EMI ended talks to be acquired by buyout firm Permira Advisers LLP, after failing to agree on a price.

Credit-default swaps based on 10 million euros of EMI's debt rose 15,000 euros to 175,000 euros, according to Lehman Brothers Holdings Inc. Credit-default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. An decrease indicates an improvement in credit quality.

Sales Slump

EMI and Warner's music sales have slumped since the companies each offered about $4.6 billion for the other in June. The combined company would have a quarter of the global market, moving ahead of Sony BMG to rank behind Vivendi SA's Universal Music Group.

The North American market for compact discs has contracted 20 percent this year, EMI said last week, citing Nielsen Soundscan figures.

EMI, which released albums by Robbie Williams and Norah Jones in the second half, said Feb. 14 it was experiencing an ``unprecedented level of market decline'' and ``an exceptionally high level of product returns.''

`Vulnerable'

EMI ousted its top two music executives, Alain Levy and David Munns, on Jan. 12 after disappointing holiday sales. Eric Nicoli, then chairman, was named chief executive officer.

Warner, under Chief Executive Officer Edgar Bronfman Jr., said Feb. 8 that sales of recorded music slid 13 percent in the quarter ended Dec. 31. Demand for new releases fell short of the year-earlier period, when the company had new albums from Madonna, James Blunt and Enya, Warner said.

``Warner Music feels EMI's management is quite vulnerable,'' said Simon Wallis, an analyst at Collins Stewart in London. ``The regulatory issues, given what's happening in the market, will probably be fixable,'' he said.

The two companies backed away from attempts to combine last year, after a July 13 ruling by European Court of First Instance in Luxembourg cast doubt on whether a merger would win approval.

The court threw out regulators' approval of the merger that created Sony BMG in 2004, saying the European Commission, the EU's Brussels-based antitrust regulator, had only carried out ``an extremely cursory examination'' of the effects of the merger. The court ordered the regulator to review the transaction again.

The European Commission will rule on the creation of Sony BMG by March 1, a commission spokesman said on Jan. 31.

EMI said today that any proposal from Warner would be examined with a focus on the regulatory environment.

Merger Attempts

Nicoli, 56, has tried since 2000 to buy Warner, the world's fourth-largest music company, as a way to reduce costs.

EMI and Warner dropped efforts to merge in 2000 after regulators opposed the plan. EMI's attempt to buy Bertelsmann AG's BMG unit in 2001 was also stymied by regulators. EMI again failed to combine with Warner in 2003, when a group led by Bronfman won the bidding for Time Warner Inc.'s music unit.

EMI has two divisions: EMI Music, the recorded music unit, and EMI Music Publishing, which manages song copyrights. EMI said last week that the publishing unit ``continues to perform in line with expectations.''

The company reported a first-half loss of 30.6 million pounds in November, saying sales fell 6.1 percent because this year's release schedule is weighted to the second half more than usual.

To contact the reporter on this story: Aisha Phoenix in London at aphoenix@bloomberg.net .