EU court judgment threatens EMI merger with Warner

The long-awaited merger between the music giants EMI and Warner Music looked to be in danger of derailment yesterday after a European Union court sensationally annulled the 2004 clearance of the merger between Sony Music and BMG.

Since May, EMI and Warner have traded blows in a high-profile battle to create the world's second-largest music company. Both lodged unsuccessful £2.5bn offers to buy each other last month. The counter-bids suggested the merger was inevitable one way or another.

Yet the discussions have been thrown into disarray after the European Court of First Instance declared the European Commission's clearance of the merger of Sony and BMG in 2004 null and void. After a complaint by Impala, a European independent music label trade body with 2,500 members, the court said the EU's original investigation into the competitive impact of the merger was "inadequate." It criticised the commission for "an extremely cursory examination".

EMI's latest bid to buy Warner is its third attempt to purchase its smaller US counterpart. Its original bid was blocked by regulators in 2000, but the EU clearance of Sony BMG's tie-up provided more certainty that a deal would be cleared six years on.

Eric Nicoli, the chairman of EMI, told shareholders at the company's annual meeting that the rationale for a Warner merger was still intact. "We wouldn't make a proposal if we thought we could not proceed with a bid," he said. A Warner spokeswoman said it would analyse the ruling.

However, Numis Securities said the ruling had "extremely negative implications for the potential EMI/Warner merger ... we believe any further industry consolidation will face prohibitive regulatory challenges." EMI shares tumbled 9.2 per cent to 281.75p as a result of the ruling. That compares with the 320p-a-share offer from Warner.

Hein van der Ree, the managing director of the music label Epitaph Europe and vice-president of Impala, said: "This locks the door for an EMI/Warner merger, thankfully, and keeps the doors of market access open for the little guy." But Simon Baker, at CSFB, said only the EU process had been annulled, not the merger, and the case for consolidation was stronger now than it was in 2004. Sony and Germany's Bertelsmann, who make up Sony BMG, said the judgment would be examined thoroughly.