The Thing Is: Record companies

First dance with a rival and then rock the regulators
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The Independent Online

It's rock and a hard place. The world's top five music companies are struggling to cope with the double threat of teenyboppers downloading music without paying, and gangsters making bootleg CDs. So they are trying to dance with each other.

For months, BMG, owned by German media company Bertelsmann, and Warner Music, owned by US media giant Time Warner, have been trying to merge. However, when the exclusivity agreement expired earlier this month, EMI chairman Eric Nicoli phoned Warner to propose a bid, offering $1bn (£600m) in cash and 25 per cent of EMI. BMG didn't waste any time mourning its loss, and last week it was leaked that it is talking to Sony.

The problem for all the potential combinations of Warner, EMI, Sony and BMG is that competition regulators have traditionally been very tough on the big five, which wield a great deal of power. EMI's last attempt to get together with Warner, in 2000, was foiled by the European competition regulator, Mario Monti.

This makes the current bidding round all the more sensitive. All parties know that the regulators would be reluctant to approve the consolidation of five into four, and would hold their hands up in horror at the idea of four becoming three.

So the race is on: who can get to the European regulators first. Insiders of the EMI/Warner talks - where just the recorded music divisions would be merged - are optimistic if they do.

The competition regulators had the wind taken out of their sails when a European court quashed their veto on the travel merger between Airtours and First Choice. Add that to the piracy afflicting the music industry and they are confident about their chances.

But it is understood they have not yet sounded out the regulators, a first step before they officially file for approval.

There are also practical problems with the new stage show of EMI-Warner and BMG-Sony. EMI has a tight balance sheet and could find it hard to fund its bid for Warner. BMG and Sony Music's parent are not blessed with cash either, so both could find it difficult to make a clean bid. These factors could well mean that the original BMG-Warner deal is rekindled.

The one thing that EMI and Sony need to do is get to the competition regulator's office quickly before their prospective partners get itchy feet. And more importantly, they need to be the first to the altar.

Otherwise, the strictest vicar of them all - Mario Monti - might not allow them to wed at all.