EMI off key in big players' merger talks

EMI could find itself left out in the cold after renewed talks emerged yesterday between AOL Time Warner and Bertelsmann aimed at combining the media groups' recorded music businesses.

The negotiations are the latest in a long series of discussions around seemingly endless combinations of the five music majors. The industry is facing brutal market conditions and companies are looking intently at ways to gain economies of scale. Music sales are falling sharply worldwide amid rampant piracy.

The talks are said to be at an early stage but could deliver a significant blow to Britain's EMI if they were cemented. In recent months EMI, the last sizeable music independent, has held sporadic discussions with AOL Time Warner and Bertelsmann's BMG. One line pursued would have seen EMI buying Warner Music outright.

EMI, whose artists include Robbie Williams and Radiohead, has stated its belief in the need for consolidation, but previous attempts to merge with Warner Music and BMG were frustrated by regulators. Since those attempts three years ago market conditions have worsened considerably, stoking the belief that Washington and Brussels might now look more sympathetically at a deal.

Shares in EMI were under pressure yesterday, affected by fears that it could be left out of a deal, and ended down 1% at 125p. In a research note, investment bank Lehman Brothers warned that "a merger involving EMI would likely be a positive for the stock, but the merging of two competitors would leave EMI stranded". ABN Amro downgraded the company to a "sell".

Warner Music is the global industry's fourth largest firm, with artists including Madonna and the Red Hot Chilli Peppers, while BMG is number five and home to Avril Lavigne and Dido. EMI is the third largest, behind Sony and sector leader Universal Music. "The problems in the industry are well known and everyone is talking to everyone else," said one insider.

AOL Time Warner is eager to reduce its debt, now at more than $26bn (£16.2bn), and recently identified the CD and DVD making unit of Warner Music as a candidate for sale. It is expected to raise around $1bn. The company is also looking at potential separate offers for its Warner Chappell music publishing division. The music arms of AOL Time Warner recently reported a first-quarter operating loss of $14m, with sales at $914m, against $947m.

According to a report of the new talks in the Wall Street Journal, the two firms are considering a merger of their recorded music divisions, with each owning 50% of the combined operation. But significant hurdles still exist, including reaching agreement on a valuation of the companies' assets.

Bertelsmann was last year forced to honour a longstanding agreement to pay $2.7bn for full control of Zomba, an independent with artists including Britney Spears. The transaction increased Bertelsmann's expo sure to a volatile music market at a time when an advertising recession hit its core broadcasting business, RTL Group. The privately owned conglomerate has also been distracted by disputes between managers and its controlling shareholder, the Mohn family.

The firms involved declined to comment. "When we are ready to announce something, we will," said an AOL Time Warner spokeswoman.

Vivendi's Universal Music recently took merger discussions in a fresh direction in talks with Apple Computer.