Where merger talks end, nobody knowsWall Street observers gave contradicting reviews of another potential takeover play by Warner Music Group for EMI Group last week amid an uncertain outlook for the music business and stocks that have been setting 52-week lows.
The talk came even though a firm offer from WMG is far from certain. Reports say it wants to take a close look at EMI's books first and that private equity firms are also circling EMI again.
UBS analyst Ian Whittaker said a WMG deal right now would be good news for EMI investors and more attractive than other options.
"While there are a number of possibilities for EMI, we think that the best outcome from a shareholders' perspective would be another bid from Warner Music," he said.
Banc of America Securities analyst Michael Savner upgraded WMG from "neutral" to "buy" last week and boosted his price target by $1 to $25 after a recent decline in the stock due to lower-than-expected fiscal first-quarter results.
"Warner's current valuation now fairly reflects the difficult comparisons in the first half of 2007," he said. "Further, a potential combination between Warner and EMI is likely to create an extended positive bias toward Warner."
Savner suggested that "a firm agreement and regulatory approval could take in excess of a year to complete and partly masks the fundamental challenges both (companies) are facing." Nonetheless, overall WMG shares look "increasingly attractive," he said.
Richard Greenfield, analyst at Pali Research, took a different approach to a potential merger of the two big, publicly traded music firms.
"We would sell a combined WMG/ EMI as the industry outlook grows more ominous," he said in his latest bearish music-sector report. "Putting aside whether a merger is possible from a regulatory standpoint (which is no small issue), we simply do not believe that a combined WMG/EMI would be an attractive stock."
Greenfield agreed with his peers that cost savings could be "significant" at what he estimates to be $200 million. However, he argued that a merged firm "would be overvalued at current levels — not to mention dangerously leveraged."
In addition, Greenfield fears that "WMG may feel increasing pressure to overpay for EMI given the backdrop of its own financial difficulties and the 'perceived' threat of private equity interest in EMI."