SENIOR executives at EMI, the British record label, and its American rival Warner Music Group are preparing for preliminary talks that could lead to the creation of the world’s third-largest music company.

Sources close to both groups said the firms’ on-off discussions would resume in earnest within months, with advisers on both sides being briefed to prepare for merger talks.

EMI, which counts Coldplay among its top artists, is understood to have lined up Citigroup and UBS to assist it, while Goldman Sachs and Lehman Brothers are in the frame to advise Warner.

If the long-awaited deal does take place, it would create a group that would number among its portfolio of artists such names as Madonna, Eric Clapton, Eminem and Scissor Sisters. A merged company would be a threat to the two global giants of the music business, Universal Music and Sony BMG.

Although no approach has yet been made by either company or its advisers, sources close to both said this weekend they were separately working through the potential structure of any transaction.

“This deal’s going to happen. The only question is timing,” said one adviser this weekend.

Attempts by the two companies to merge have failed twice before on regulatory grounds, but the changing nature of the music industry has led analysts to suggest that a deal would now be viewed more favourably by competition authorities.

The music industry is also awaiting another significant deal, with the German media company Bertelsmann preparing to sell its stake in SonyBMG.

Aside from Warner Music, industry observers believe that Apple, the computer giant that has scored a huge success with the iPod and iTunes, could be interested in a bid for EMI.

Recent rises in the EMI and Warner share prices have prompted speculation that the companies are already in merger talks, but sources close to both denied that this weekend.

Key issues that would need to be resolved include the proposed structure of a deal.

EMI has a market value of £2.2 billion, while Warner, quoted on the New York Stock Exchange since last May, is worth $3.6 billion (£2 billion) at Friday’s close.

Management issues will also be an important factor, with Eric Nicoli, the chairman of EMI, and Edgar Bronfman Jr, his opposite number at Warner, both understood to be keen to take senior roles.

Last week EMI reported its first real revenue growth in five years, announcing that stronger-than-expected sales by artists such as Coldplay and KT Tunstall should lift revenues by almost 4% this year.

The news reversed a long decline that the company blamed on piracy and the growth of digital downloads.

Despite that good news, EMI remains a minnow in America, the world’s largest music market.

Warner Music is EMI’s closest competitor in the United States and accounts for 18% of the market, compared with EMI’s 10%. Music giant Universal controls 31% and Sony BMG nearly 29%.

In 2004 Warner Music was bought from the media giant Time Warner by a consortium led by Bronfman, heir to the Seagram whisky fortune. The private-equity firms backing him, including Providence and Bain Capital, reaped huge returns when the group went public.

Warner’s sales have been driven by new acts, including Britain’s James Blunt, as well as established stars such as Madonna. Last week Warner had a record four albums in the American top 10, while EMI had none.

Warner said this weekend: “As a matter of policy we don’t comment on rumours.” EMI also declined to comment.

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