EMI, the British record company, is still optimistic of reaching a merger agreement with its rival Warner Music, despite its initial $4.2 billion (£2.3 billion) bid being rejected, The Times has learnt.

It is understood that the company believes that it can gradually win round Warner Music’s mainly venture capital shareholders with a deal that analysts estimate could bring £100 million of synergies to the enlarged group.

The thinking is that Warner Music’s shareholders, led by Thomas H Lee, eventually need an exit and EMI is the only logical buyer for the business, because other music groups would be prevented by regulatory reasons.

However, EMI’s first cash and shares bid, made on Monday and worth $28.50 per Warner share, failed to make any headway. It was rejected unanimously by the Warner Music board — which includes representatives of all the principal shareholders.

Those close to Warner argued that the bid, a premimum of only 4.4 per cent to yesterday’s share price, was simply too low and failed to uncover any split among Warner’s dominant investor group, which also includes Bain Capital, Providence Equity Partners and Edgar Bronfman, the chief executive.

Warner was also disappointed that the bid was a mixture of cash and shares, although the majority was believed to be in cash. EMI will have hoped that, by offering some stock, it was allowing the selling shareholders some portion of any future cost savings.

Warner Music shares improved modestly, closing up 71 cents by lunchtime in New York, while EMI stock gave up 11½p to close at 270½p. That would value the bid at about $27.65 a share, implying that the market is hoping that an improved offer will emerge.

EMI is not thought to be ready to return with an improved offer immediately, but in a statement it made its long-term interest clear, arguing that it “continues to believe that an acquisition of Warner Music by EMI would be very attractive to both sets of shareholders”. Although the short-term premium to the Warner share price was modest, the American company — home to the stars Madonna and James Blunt — has seen its share price lift off in the past few weeks as hopes of an EMI bid surfaced. That suggests that much of the bid premium was already in Warner Music’s share price.

EMI is ranked No 3 in the world music market, but has long struggled in Warner’s American heartland. EMI’s global market share is 13.4 per cent, but only 11 per cent in the United States, while Warner has 11.3 per cent globally and 18 per cent in its home market.

Meanwhile, there were suggestions yesterday that Bertelsmann, part-owner of Sony BMG, may change its mind about selling its half-share in the company and borrow €4 billion (£2.7 billion) to buy out its minority investor, GBL.

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