BERTELSMANN & EMI,
SITTING IN A TREE?

After several days of speculation, which dramatically spiked EMI stock shares, the two companies confirmed they were talking about merging their music holdings to go up against current marketshare leader Universal Music Group.

EMI shares were up 27.5 pence, a 5.1% hike, closing at 571.50 in today's trading on the London Stock Exchange, after increasing 32 pence, or 6.25%, yesterday in heavy trading, reacting to media speculation about a possible link-up with Bertelsmann (see yesterday's story).

Not surprisingly, Bertie was circumspect about the exact nature of the talks. "We confirm that we approached the board of EMI Group PLC regarding a possible combination of BMG with EMI," a Bertelsmann spokesman told AP. "The transaction which we proposed does not involve an offer being made for EMI. No detailed discussions have yet taken place, and there can be no assurance that the transaction will result." The AP report surmised that the discussions were about a merger of the two companies' music-publishing assets, but it's likely that there's more on the table than a pubbery deal.

Bertelsmann had proposed folding its music assets into EMI in return for a substantial stake of the U.K. company, which boasts the largest music publishing catalog in the world. A pairing would give BMG and EMI 25% of the global music industry, which would have it running neck-and-neck with current leader UMG. The European Commission had previously indicated it would turn down EMI's attempt to merge with the Warner Music Group without substantial concessions. Time-Warner still has an exclusive negotiating position with EMI until January, and the two parties have suggested they would continue to try to hammer out a deal, though most observers feel the companies are just posturing to save face.

A senior fund manager told Reuters: "We have not written off Warner Music yet [as a partner for EMI]. It might take place in some shape or form. This [proposed Bertelsmann-EMI deal] will make sure Warner doesn't dilute the terms."

Bertelsmann's interest in EMI comes in the wake of Chairman Thomas Middelhoff's acceptance of the resignations of BMG's two highest-ranking executives, President/CEO Strauss Zelnick and Chairman Michael Dornemann, and subsequent hiring of Rudi Gassner as new BMG Chairman/CEO.

Middelhoff, who previously indicated his desire to make BMG the world's top music company, made a huge splash with his announcement of a strategic alliance with legally challenged file-sharing service Napster.