WARNER Music is examining whether it can raise funds to mount a counterbid against its British rival EMI, although the move will have to be pitched at well over 300p a share for it to have a chance of success.

Edgar Bronfman, the chief executive of Warner Music, has long harboured ambitions to buy EMI, home to Robbie Williams, and is believed to be seeking new investors to support him in what would be a £2.8 billion bid.

His manoeuvres have unsettled EMI, which is considering its next move after a $4.5 billion, $28.50-a-share bid for Warner was rejected last month.

It is far from certain that Mr Bronfman will be able to succeed. The Canadian heir to the Seagram drinks fortune has to deal with the venture capital consortium consisting of Thomas H. Lee, Bain Capital and Providence that backed his buyout of Warner Music from Time Warner in 2004. All have made roughly a fourfold profit after cost-cutting and a focus on digital have helped to revive the fortunes of the business.

Under one scenario, new investors would buy the shares held by the venture capitalists, forming a shareholder base to support a move on EMI. Thomas H. Lee holds 38 per cent of Warner, Bain has 16.2 per cent, Providence 8.7 per cent and Mr Bronfman himself controls 11.77 per cent.

The four form an investor club and each has agreed that it cannot sell to EMI without the approval of the Warner board, and the permission of Thomas H. Lee and one of the other three — making it hard for the British company to pick them off individually.

EMI shares ended the day up 3p at 269¾p, while Warner eased 9 cents to $26.33 at the close in New York last night, their lowest since news of EMI’s interest emerged. EMI has been holding back on returning with a second bid, which Wall Street was hoping would be above $30 a share.

The British company’s strategy has been to wait in the belief that if it rushed into a second offer it would risk overpaying. Warner Music’s share price had lifted off in the hope of a bid. Although the American group has a similar market value to EMI today, it is trading at higher multiples of profits.

EMI believes that it can generate about £160 million a year in synergies across both groups’ recorded music operations, and it is widely expected that it would sell Warner’s music publishing arm, which would raise about £1 billion. The two combined would be the world’s third-biggest recorded music company, narrowly behind Universal and Sony BMG.

TALE OF THE TAPE

EMI six months to March 31, 2006

Sales: £1.15 billion
Operating profit: £141.1 million
Pre-tax profit: £85.5 million
Digital sales: 5.9 per cent
Debt: £879.5 million
Market value: £2.13 billion

Warner Music six months to March 31, 2006

Sales: £991 million
Operating profit: £101.8 million
Pre-tax income: £54.9 million
Digital sales: 8.6 per cent
Net debt: £969 million
Market value: £2.11 billion

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