WMG Rebuffs Intial $4.23 Billion EMI Offer. Merger Still Likely…But Does It Matter?

REPORT & COMMENTARY: EMI offered to buy Warner Music on Monday for $4.23 billion and were rejected. In a prepared statement EMI said that  "Warner informed EMI that it did not wish to enter into discussions regarding EMI’s proposal”.

It’s hard to see how WMG can reject such offers for long as they would represent a substantial return for investors who only two years ago paid $2.6 billion for the company and is slightly higher than the market value of $4.05 billion based on yesterday’s closing price.  "Today’s announcement highlights the difficulties in putting together such a deal, particularly with respect to valuation and management,” Lorna Tilbian of Numis Securities told Bloomberg News. "If Warner is holding out for a higher price, this raises the risk that EMI could overpay.”

Warner Music said in a statement that it’s board received and "carefully evaluated” the offer together with its legal and financial advisers and "determined that the proposal is not in the best interests of our shareholders and has unanimously rejected it."

Many industry insiders believe that ultimately the deal will go down creating the world’s second largest music company by combining it’s third and fourth sized players. CNBC reports that the two parties are huddled in NYC negotiating now. Inside both label groups spirits are low fueled by fears that lay-offs and artist cutbacks in this already beleaguered sector will inevitably follow.

Some observers believe that the acquisition is happening to compete against a dominate Universal.  But a more critical look reveals consolidation almost forced by a faltering business model embattled by free downloads, the FCC and other legal challenges, and increasing competition from smaller outfits and other entertainment choices.

EMI and WMG will probably merge, but for most in the industry little will have changes as they use new media and technologies to create a new music industry from the ashes.

Read the short WMG press release here.