IN THE twelve months since Warner Music Group floated on the New York Stock Exchange, the music world has reached the almost unanimous view that it will merge with its British rival, EMI.

The certainty that a tie-up between the two record companies is a question of when, not if, has helped to bolster Warner’s shares by 20 per cent over the past three months.

But there remains one small group of industry players who do not — at least in public — subscribe to the merger theory: the staff of Warner and EMI.

Warner’s most senior executive outside America was this week singing to The Times about why his company can — and perhaps should — remain independent from EMI.

Paul-Rene Albertini, the Frenchman who heads Warner Music International, says that he is “not aware of any (merger) talks”, despite the heightened expectation of a deal.

“We are not obsessed with the possibility of a merger,” he tells The Times. “Maybe in a year from now this company will be merged, maybe it won’t. I don’t get up in the morning and think about EMI.”

But music analysts clearly are wondering. “I believe a deal will be done in the next couple of years, because there is a great deal of strategic synergy to be had. The question is simply when,” says Rich Greenfield, an analyst at Fulcrum Global Partners in New York.

On September 30, Warner Music ended its first financial year as a quoted company, having raised $556 million (£312 million) from a share sale less than two years after Time Warner sold it to a consortium of private investors for $2.6 billion.

Warner’s shares initially dived to below the issue price, but the shares have since rebounded to well above their initial public offering price, driven both by merger speculation and surprise at the strength of the company’s recent third-quarter results.

Stripping out one-off costs associated with its flotation, the results in August beat Wall Street’s expectations, as losses fell to $35 million and sales rose by 2 per cent to $742 million. Analysts believe the forthcoming full-year results will be strong again. “Warner Music will have a solid fourth quarter and first quarter of the new financial year because it’s had a very strong release schedule,” says Mr Greenfield.

Warner can attribute much of its recent success to the public’s appetite for earnest troubadours such as David Gray, James Blunt and Damien Rice. Gray’s new album Life in Slow Motion has sold more than 700,000 units in a fortnight, while newcomer Blunt has sold more than three million albums, and Rice’s O has sold almost two million.

Warner floated on the New York Stock Exchange in May. The lock-up period for insiders expires in mid-November, allowing the private equity investors to begin hawking their stakes. It is then, observers believe, that EMI will begin to have serious discussions with Thomas H. Lee, the billionaire leveraged buyout tsar whose private equity firm owns the majority of Warner’s shares.

But Warner insiders argue that unlike last year’s €5 billion Sony-BMG merger, which generated an estimated $300 million of savings, there may not be enormous cost benefits from a merger with EMI. Both companies have already drastically cut back their payrolls and artist rosters in the past three years.

M Albertini and Lyor Cohen, who runs Warner’s American business, say that it may even be to Warner’s advantage to remain the size it is. Although it is the smallest of the four “majors” of the music industry, it still has a global reach, and they say that its modest size — with roughly half the sales and global market share of Universal and Sony BMG — allows it to pay greater attention to artists. “The benefit of being a major record company is that you can market globally, into any country. You can sell artists into all territories. That’s one difference between being us and being an independent,” Mr Cohen says.

Being large may have its benefits, but Albertini adds that it “can also bring other problems. You may not be able to focus on your artists as well as we can right now”. A recent overhaul has seen Warner vastly increase spending on artist development and marketing, partly at the expense of manufacturing and distribution.

Although Warner’s market share fell in 2004, Mr Cohen says that this occurred when the company was in the process of a global restructuring, in which it cut 1,000 employees, cut loose a quarter of its acts and restructured its marketing operations. He also notes that the outlook for the music industry appears to be brightening.But, success or not, M Albertini and Mr Cohen are unlikely to have any real say in whether EMI and Warner Music merge.

That decision will be made by Mr Lee, who will be looking for the most profitable exit from the company, and Eric Nicoli, EMI’s chairman, whose primary role is to maximise value for his shareholders.

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