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KKR and Warner Music eye break-up bid for ailing EMI


KKR, the private equity firm, is in talks with Warner Music to launch a break-up bid for Warner’s rival, EMI.

The two have met in recent weeks to discuss how they would structure a deal for EMI, which is expected to be put up for sale this summer.

The revelation ups the ante for EMI, home to artists such as Robbie Williams and Coldplay. It must devise a rescue plan in the next three weeks that will convince investors to stump up another £120m or face being taken over in June by its lender, Citigroup. Last week, EMI was rocked by the abrupt departure of music boss Elio Leoni-Sceti.

KKR, which filed for a New York stock market listing on Friday, is keen to acquire EMI’s music publishing arm, which owns the rights to songs such as Over the Rainbow and Santa Claus is Coming to Town. It already has a publishing joint venture with Germany’s Bertelsmann.

Warner wants EMI’s recorded music division — a prize it has pursued for nearly a decade. The tie-up has previously been blocked by competition authorities, but Warner chief Edgar Bronfman Jnr is sure it will go through this time.

Bankers value EMI Music Publishing at £1.2 billion. Putting a price on its recorded music arm is much harder. Although it generated 55% of EMI’s £293m group earnings before restructuring costs last year, buyers wonder whether it has a future. Big-name acts such as the Rolling Stones and Radiohead have already deserted, with more expected to follow.

Sources say there has yet to be any contact with EMI and that a bid is unlikely to happen until the company has resolved its stand-off with Citi. It must find £120m to cure a covenant breach on its £3.2 billion of loans by June 14. At the same time, EMI’s owner, Terra Firma, has soured relations with Citi by suing it for allegedly misleading it over the sale of EMI in 2007.

Both divisions of EMI are preparing five-year business plans that will include profit projections but are not thought to earmark assets for disposal. Charles Allen, the former ITV boss who has stepped up to replace Leoni-Sceti as executive chairman of EMI Music, will aim to demonstrate how EMI has developed reliable earnings streams in areas such as digital. He will point out EMI can still produce hits, such as Plastic Beach, the new release from Gorillaz.

The business plan will be submitted through Maltby Investments, one of EMI’s parent companies, which will mediate between Terra Firma and Citi. To give it another 12 months of breathing space, Terra Firma needs to win the backing of 150 out of 200 investors, who have already seen their initial £1.8 billion EMI investment all but wiped out.

However, Maltby is also expected to recommend how much debt EMI can feasibly carry. If Terra Firma and Citi agree, that will pave the way for a debt-for-equity swap that is likely to hand control of EMI to Citi, which will auction off the business.

Hands, who has relocated to Guernsey, will find out in the next two weeks whether he must return to London for his Citi court battle.

KKR said: “Our policy is not to comment on deal speculation.”

Online revenue growth offset CD and DVD decline for the first time last year for Britain’s composers and songwriters. PRS for Music, the collecting agency, reported annual income up 2.6% at £623m, helped by a 19% increase in overseas income.