WARNER MUSIC will have to offer nearly 400p — or £3.2 billion — if its audacious counterbid to buy its rival EMI is to succeed, it emerged yesterday, after each company revealed that it had tried to buy the other twice.

The day of claim and counterclaim tilted the balance towards the Warner camp, who believe that they have a chance of persuading EMI’s investors to force a sale — ending the long history of the British-owned music industry.

Insiders at Warner, home to Madonna and James Blunt, said they were confident that they had the firm backing of their three principal venture capital shareholders. “By rejecting EMI’s bids, this is saying that Warner investors simply do not want to sell.”

Yesterday it emerged that the two companies had spent an improbable fortnight desperately bidding for each other, as they vied to become the dominant partner in a deal that would bring EMI’s The Beatles, into harmony with Warner’s Fleetwood Mac.

The duel pits Edgar Bronfman, Warner’s chief executive, the Canadian heir to the Seagram family fortune, against EMI’s Eric Nicoli, the former United Biscuits boss, who has tried repeatedly to win Warner in six years as chairman. Both are playing to be at the top of the global music industry.

EMI and Warner Music are the third and fourth-largest companies in the global recorded music market, but are a long way behind the Vivendi-owned Universal and SonyBMG.

This month Warner made a 315p — £2.5 billion — all-cash counterbid for EMI, which was swiftly rejected by the British company. Nine days later EMI replied with a cash bid worth $4.6 billion (£2.5 billion), or $31 a share. Warner refused to accept that, partly because it was conditional on the “pre-sale” of its music publishing arm.

Four days later, Warner upped its offer to 320p, but that, too, was rejected because EMI’s board believed that the counterbid was not as generous as its own offer. According to one calculation circulating in the British camp, EMI was willing to offer a 44 per cent premium to Warner’s pre-bid speculation, which it said was $21.50.

At that time, EMI was trading at around 275p. An equivalent 44 per cent premium would take its own share price to 396p. A bid at that level would probably be hard to resist, and the company feels that there is “no dilemma at all” in rejecting any bid below 350p, although it could take more than that to succeed.

The saga began at the beginning of May, when EMI made a cash-and-shares bid worth $4.2 billion for Warner, priced at $28.50 a share and comprising $20 in cash and $8.50 in EMI paper.

That was rejected by the Warner board, although EMI was working on the basis that it could eventually persuade Warner’s backers.

Warner is controlled by a consortium of Thomas H. Lee, Bain Capital and Providence Equity Partners, plus Mr Bronfman himself. They have an agreement to act as a bloc, making it difficult for EMI to dislodge them individually.

EMI shares were up 23¾p to 307½p. Warner Music added 88 cents in afternoon trading to hit $28.11.

THE TWO SIDES

• Warner Music’s argument for buying EMI rests on the performance of the business since it was bought out by Edgar Bronfman and a syndicate of venture capitalists. Under Time Warner the music operation had been bloated and struggling to maintain share. In the past two years costs have been cut and Warner has had successs outside its US heartland with acts such as James Blunt. It has attempted to become a digital leader, boasting higher share of digital sales than EMI at about 10 per cent, and tried to promote new ideas such as mini- albums through its label Cordless. But it remains smaller than EMI in every key market other than the US and runs its internation- al operation from New York — raising questions about its ability to export music to the world.
  
  
• EMI’s argument for buying Warner rests on the belief that it has proven management in recorded music and a stronger music publishing business, which is the world’s leader. The company’s recorded music division is run by Alain Levy, who helped to build Polygram until he was forced out after that company was acquired by Edgar Bronfman’s Seagram (now Universal). EMI also believes that it is better at developing successful operations around the world, as well as exporting British talent such as Coldplay and Robbie Williams into Europe. However, EMI’s weak spot is the US, where it ranks a poor fourth and, despite decades of trying, only occasionally finds a breakthrough act like Norah Jones. It hopes that buying Warner will finally solve its American problem.

  CALLING THE TUNE
  
  

• June 28: EMI’s board rejects Warner’s second offer as “wholly unacceptable” and continues to press for Warner’s capitulation. Its shares rise 8.4 per cent on the announcement

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