EMI rises on talk of a $4bn takeover of Warner

Shares in EMI, home to the multiple-Grammy winner Norah Jones, rose sharply yesterday on news that it is in preliminary talks regarding a takeover of Warner Music, part of the AOL Time Warner media empire.

The shares closed 6p higher at 114p in response to the reports EMI is looking to buy a majority stake in Warner, which would value the US group at $4bn (£2.5bn).

EMI declined to comment on the speculation that it was talking to AOL Time Warner about a deal that would create the second-largest music group in the world behind Universal. The combined company would have a worldwide share of 22 per cent, behind Universal's estimated 29 to 30 per cent.

The deal would be a defensive move designed to protect Warner and EMI from falling music sales as increasing numbers of consumers download music from the internet for nothing. The two groups held talks in 2000 about a merger of their music interests but it was blocked by regulators in Europe.

EMI's roster of artists include Robbie Williams and Coldplay as well as a back catalogue that includes the Beatles. Warner is home to Madonna, Linkin Park and the Red Hot Chilli Peppers as well as the Eagles.

One analyst said: "I don't really see that the landscape has changed sufficiently for EMI-Warner to get together in their entirety because of the scale of the music publishing interests. If you took that out it would be a lot more palatable to regulators but a lot less attractive to shareholders."

EMI and Warner are ranked first and second globally in music publishing, which is the sale of music rights for advertising, films, radio playlists and even mobile phone ringtones. The two would have a combined share of 31 per cent.

Simon Baker, media analyst at SG Securities, said: "I really don't see there's a lot new here. There's an air of desperation on the part of the music industry as they face this severe structural decline. Perhaps the easiest way to overcome that is though a merger which would bring with it enormous cost savings." These have been estimated at about £150m.

Analysts also questioned how an EMI bid for Warner Music would be funded. AOL Time Warner would want cash as it seeks to cut debt. But EMI itself has debts of more than £1bn. Reports suggested EMI might seek a private equity partner to inject cash into a deal, but the company declined to comment.

EMI is the only one of the "Big Five" music majors that is independent of a large media group. But its shares have been hit hard by the decline in the music industry which says sales of recorded music fell9 per cent last year. The shares have dropped from 370p since last March and from almost 800p in early 2000. Yesterday Moody's said it was considering cutting its rating on EMI's debt due to concern over falling music sales.

EMI has also held talks in the past with BMG, part of the German Bertelsmann group. But a deal with Warner would help boost EMI's relatively weak position in the US, which is the world's largest music market.

Separately yesterday EMI said Norah Jones's Come Away With Me album had earned her eight Grammy awards.