The Investment Column: EMI could soon be dancing and singing to a different tune

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The Independent Online

Our view: Buy

Share price: 250.5p (+2p)

At the end of last month, EMI and Warner Music abandoned their merger plans after a European court ruling annulled the 2004 regulatory clearance of the Sony BMG music merger. The court move cast serious doubt on whether competition regulators would allow more consolidation in the music industry so EMI/Warner Music's decision to call off their marriage is understandable.

Nevertheless, the effect it has had on EMI's stock market valuation looks to be excessive. In the wake of the news, shares in the music group behind Robbie Williams and Coldplay slumped from 315p to close at 250.5p yesterday. However, EMI shares are unlikely to remain so cheap for very long. The auction of Bertelsmann Music Publishing is heading towards its final stages and should be completed in the not too distant future.

Reports suggest that there has been significant interest in the business from both trade and private equity buyers. Early indications point to the company being acquired on a multiple of up to 19 times earnings.

At EMI's current share price, its Music Publishing division (which accounts for around 75 per cent of the group) is valued at a substantial discount to this valuation. If it were to match the value being placed on Bertelsmann Music Publishing, its shares would have to rise to 310p. Hence, the completion of Bertelsmann's auction should act as a catalyst for a major re-rating of EMI stock.

There is also a good chance that Europe re-approves the Sony/BMG deal over the next six to twelve months. Such a decision would almost certainly lead to a resumption of merger talks between EMI and Warner Music, with EMI's share price once again heading to the 315p level.

The cost savings alone that such a tie-up would generate are worth tens of million of pounds, so it makes a lot of sense for both parties. The combined company would create a rival on par with market leader Universal Music, owned by France's Vivendi.

All this makes EMI a great long-term bet for investors.

Management Consulting Group

Our view: Worth a punt

Share price: 54.5p (-0.5p)

No prizes for those who work out what line of business Management Consulting Group (MCG) is in. The company is at present busy integrating an acquisition (unveiled last month) which when completed next month will double its size.

MCG bought the former French consulting operations of Deloitte, called Ineum, for £81m. The business is a leading financial management practice and will be folded into MCG's existing operation in France and will be headed up by Didier Taupin, Ineum's chief executive.

The cost savings associated with the deal are small. The real benefits of the tie-up come from revenues synergies - that is, selling MCG's existing services into Ineum's client base, which includes many of France's biggest companies.

Partners at Ineum are certainly well incentivised to make the deal work. They have all been given substantial equity stakes in MCG and cannot sell any of their shares for at least three years. Meanwhile, the risks associated with integrating Ineum into the MCG fold are small because of the limited direct overlap between the two businesses.

Yesterday, MCG posted interim results which showed a rise in pre-tax profits to £7.3m from £4.7m. Analysts forecast that Ineum will boost the group's profit by 9 per cent in 2007, leaving the shares trading at just 10 times earnings for that year and making them worth a punt.

Morgan Sindall

Our view: Buy

Share price: 1,118p (+41p)

Morgan Sindall, the UK's largest provider of affordable housing, issued yet another sizzling set of results yesterday, forcing analysts to upgrade their forecasts yet again. It's become a bit of a habit over the past two years, as the group's order book has continued to swell faster than both investors and analysts thought possible.

As well as reporting a 17 per cent increase in first half pre-tax profits, on the back of a 9 per cent rise in revenue yesterday, the group boasted a record £3.4bn of pipeline business - ensuring a prosperous and profitable second half.

Furthermore, all sides of the business appear to be thriving. Affordable housing is not all Morgan Sindall does. Its office "fit-out" business, and infrastructure and construction divisions, are also firing on all cylinders.

Although now trading at more than 14 times this year's predicted earnings - a slight premium to the rest of the construction sector - Morgan Sindall's unique position in the social housing arena, diversified portfolio of businesses, and excellent management more than justify this.

Although the shares have more than doubled over the past two years, there is an excellent momentum in the business which promises to carry them further still. Buy.

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