Bertelsmann approaches EMI for music merger discussions

EMI Group, which was recently forced to back off from a proposed deal with Time Warner on competition grounds, is in talks with Bertelsmann, about a merger with the German media giant's music division.

EMI Group, which was recently forced to back off from a proposed deal with Time Warner on competition grounds, is in talks with Bertelsmann, about a merger with the German media giant's music division.

The news was seen as finally signalling the death of the Time Warner transaction, though EMI insisted that it remained in discussions with the US media giant.

It is thought that EMI was forced to make an announcement yesterday because of the sharp gains in its share price this week, on rumours of a Bertelsmann approach.

The British company said: "The board of EMI ... has been approached by Bertelsmann regarding a possible combination of Bertelsmann Music Group [BMG] with EMI."

A tie-up would put the new group on a par with Universal, the industry leader, with 25 per cent of the global music industry. EMI is the third biggest player in the sector and Bertelsmann, which is privately owned, is number five.

Thomas Middelhoff, chairman and chief executive of Bertelsmann, said in January that he wanted to make the company the biggest music group in the world within a year. Its current interests include the Arista and RCA record labels and its artists include Whitney Houston, Annie Lennox and Puff Daddy.

EMI said: "The transaction proposed by Bertelsmann does not involve an offer being made for EMI. No detailed discussions have yet taken place and there can be no assurance that a transaction will result."

Although the statement appeared to rule out a cash offer for EMI, Bertelsmann sources insisted that this remained a possibility. "It means no cash offer has been made at the moment," one insider said. "That has not been ruled out."

The other possibility that analysts focused on yesterday was that BMG would reverse into EMI, to give it a London listing. However, analysts said that the regulatory obstacles, which scuppered the proposed Time Warner transaction, remained formidable.

Rachael Briggs, an analyst at Commerzbank, said: "EMI is the perfect strategic fit for Bertelsmann but there's no way that [Mario] Monti [the European competition commissioner] would allow a full-blown merger." One of his main objectionsto the EMI-Time Warner deal was that it would reduce the number of major record companies from five to four.

Simon Baker, an analyst at SG Securities, suggested that two or more labels could be spun out of a combined EMI-BMG, to create a new player and keep the number of major players at five.

Last month, to an outcry from the rest of the music industry, Bertelsmann signed an alliance with Napster, the internet service that allows surfers to download music free and which has been blamed by the sector for the loss of huge revenues. Following that announcement, Michael Dornemann and Strauss Zelnick, the chairman and chief executive of BMG, resigned from the company.

Industry sources said that an EMI tie-up would give BMG the executive management that it is now missing. EMI shares closed up 5 per cent to 571.5p.