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Last Updated: Monday, 24 November, 2003, 15:42 GMT
What now for EMI?
Thom Yorke of Radiohead
EMI's roster of iconic bands includes Radiohead
A chill wind is sweeping through the music industry, and one of its most venerable names has been left out in the cold.

EMI, the original owner of the iconic Abbey Road studios, and backer of pivotal pop bands from the Beatles to the Sex Pistols, has been jilted by merger partner Warner Music, condemning it to an uncertain future.

The failed tie-up leaves the firm heavily exposed to a steep slump in global music sales, blamed on mass counterfeiting and the rise of online file-sharing.

With the downturn set to get worse before it gets better, experts say even EMI - the world's third biggest music group - may struggle to survive on its own.

Stopping the rot

"The decline has accelerated, and it just doesn't look good for a standalone business. The future does look rather bleak," said Jesper Jensen at WestLB Panmure.

EMI Timeline
1931 EMI formed from merger between 2 gramophone manufacturers
1952 EMI launches its first 33 rpm record
1955 EMI buys Capitol Records, home to Frank Sinatra
1962 EMI signs the Beatles
1976 EMI signs the Sex Pistols
1983 EMI releases its first CD
1996 EMI signs the Spice Girls
1998 EMI rejects Seagram takeover offer
2000 EMI-Warner merger fails
2001 EMI-Bertelsmann merger fails
2002 EMI pays 19m to end Mariah Carey contract
City investors, who last week marked EMI shares 4% lower at the first sign that the Warner merger was in trouble, clearly take the same view.

The irony is that EMI's latest troubles come as it has convincingly halted a decline in its own sales, with first half revenues holding steady in contrast to a 10% fall across the industry as a whole.

In fact, the obstacles to the firm's merger ambitions stem more from the regulatory constraints facing a sector that has already undergone a significant degree of consolidation.

In its effort to join forces with Warner Music, EMI lost out to a private consortium led by former Seagram chief executive Edgar Bronfman Jr, and also including billionaire media mogul Haim Saban.

Warner is said to have opted to go with the Bronfman consortium because it feared that a merger with EMI would be blocked by competition watchdogs.

The Bronfman bid, which consisted of a $2.6bn offer for the whole Warner music empire against EMI's $1.7bn bid for its recorded music division alone, also promised more cash upfront.

This was an important consideration for Time Warner, which is keen to pay off its debts.

Merger logjam

However, the outcome might have been very different had it not been for a second music industry merger - currently awaiting regulatory approval - between Sony Music and BMG, part of German media giant Bertelsmann.

EMI and Warner are seen in the industry as natural merger partners, with a tie-up between the two thought likely to deliver about $300m in cost savings.

The EMI bid is also said to have enjoyed the support of senior Warner executives.

Norah Jones with her Grammy awards
Norah Jones' album has been a recent highlight for EMI
But Warner reckoned that any attempt to join forces with EMI while Sony and BMG were planning their own mega-merger stood no chance of getting past the regulators.

EMI's failed merger attempt - its third in three years - leaves the firm looking decidedly vulnerable.

There has been speculation that the company could itself fall victim to a takeover attempt, with US private equity group Blackstone named as a possible buyer.

But Blackstone is thought unlikely to offer enough money to win the support of EMI shareholders.

There have also been suggestions that the Bronfman consortium may attempt to buy EMI in turn, although this would run into precisely the same regulatory obstacles as the original EMI-Warner tie-up.

Musical chairs

However, EMI may find alternative ways of shoring up its position.

Some analysts believe that the Bronfman group may opt for a piecemeal sale of the Warner Music empire, in which case EMI is likely to top the list of would-be buyers.

A second option would be for EMI to try and open fresh talks with BMG, two years after an initial attempt at a tie-up between the two firms fell through.

This strategy could win support from the City, where many analysts believe that BMG would fit better with EMI than with its current merger partner, Sony.

EMI is understandably remaining tight-lipped on its precise intentions.

The merger music may have stopped for now, but there is sure to be an encore.

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