By Clare Matheson
Business reporter, BBC News
EMI and Warner have been on the merger merry-go-round since 2000
EMI's plan to refinance its publishing division is no accounting technicality; rather it is a desperate measure to fend off hostile takeovers.
The British music group has long been seen as a vulnerable target, largely because it is struggling with large debts and falling CD sales.
To cut costs and protect its finances, EMI has already been undergoing a revamp that aims to save £110m by 2008, and it has suspended its dividend payments until 2009.
Yet, EMI's weak US sales remain a burden for the group, which recently had to admit that its music revenues are set to fall 15% this year, coinciding with a renaissance for the rest of the industry as buyers embrace digital formats.
EMI has one of the industry's largest music catalogues, which includes such songs as I Heard It Through the Grapevine and New York, New York. It is paid a fee each time one of its tunes is played on the radio or in adverts.
By refinancing the music publishing division, with the help of Deutsche Bank and Royal Bank of Scotland, EMI would be able to borrow £1bn against the unit's revenues and use the money to pay off its more expensive loans.
If the plan goes ahead, the move would cut off a potential line of attack from potential bidders looking to use the publishing arm as a means to finance a bid.
Rival and sometime suitor Warner is believed to be considering the sale of the business should it successfully win over EMI, and is using the potential sale to gain backing from banks.
And under current regulations, Warner is likely to have to sell off the publishing division of either firm should a buyout be successful.
The music publishing industry makes money through administering and exploiting copyright rather than through selling CDs or digital tracks, and so is less volatile than the recorded music industry.
But if EMI makes the first move and cashes in on the division, it could build up its cash pile and see off any future takeover.
As recently as March, EMI rebuffed a £2.1bn takeover approach firm US rival Warner, insisting it was too low.
The latest approach was one in a long-running tussle between the two, which began back in 2000.
Since then there have been more buyout bids from the US firm and even approaches from private equity investors.
In a spin
So far this year, EMI's problems have triggered two profit warnings. EMI now says profits for the year to March would be "significantly" below expectations.
It's first alert pointed out that US sales had declined by 20% due to "continued and accelerating deterioration in market conditions".
Analysts insist the best way out of the mess would be a merger.
"Synergies of any potential merger have long been discussed." says Richard Hunter, media analyst at Hargreaves Lansdown.
"It's a no brainer.
"A deal would bring an estimated hundreds of millions of pounds in cost savings."
And according to reports, several predators, including US hedge fund Fortress, are lining up to join Warner's pursuit of EMI.
Fortress would not be the first non-music firm to approach the group.
Towards the end of last year, EMI turned down a £2.5bn, or 320p a share, approach from private equity group Permira - the name behind businesses such as fashion retailer New Look and cut-price hotel chain Travelodge.
Meanwhile, EMI itself is said to be frantically broadening its defence strategy.
As well as plans to borrow against its catalogue of hits, some in the industry suggest it is working hard to ensure that a management buyout goes through, while others believe it is considering the sale of its music division.
2000 - EMI, Warner first attempt merger
2001 - EMI ends talks with Bertelsmann's BMG
2003 - Reports claim EMI in talks with US private equity firm Blackstone
2003 - EMI loses out in auction of AOL Time Warner music business
2006 - EMI bids for Warner, Warner then counter bids for EMI
EMI rejects £2.5bn approach from Permira
January 2007 - EMI issues profit warning
14 February, 2007 - EMI issues second profit warning
20 February, 2007 - EMI confirms approach from Warner
3 March 2007 - EMI rejects Warner's £2.1bn takeover approach
18 April 2007 - EMI warns music revues to fall 15%, suspends dividend
Some critics of a potential EMI-Warner deal have also warned such a deal could be blocked by regulators.
An EMI-Warner merger would create a firm with about 25% of the global recorded music market, according to the International Federation of the Phonographic Industry (IFPI).
A potential tie-up between Sony and Bertelsmann music division BMG hit the buffers last year when the second highest court in the European Union ruled it would unfairly affect competition.
The ruling came after a complaint from Impala, the group representing the independent music sector.
However, Warner have already tried to nip this potential problem in the bud.
It recently announced it had come to an agreement with the group, which means the industry group is now backing the merger.
"Personally I think an EMI-Warner deal will go through," says industry analyst Jojo Gould.
"There is a consolidation trend in the industry.
"Sony BMG will also probably go through, the reason being that its hard to put the toothpaste back in the tube."
Analyst Richard Hunter agrees that consolidation is the name of the game at present.
"Its just a case of survival of the fittest."