Analyst: EMI, WMG Combo Likely Would Be Merger Of Equals — If Egos Are Checked

Jessica Reif Cohen, the Merrill Lynch analyst whose tight valuation of Warner Music’s IPO was cited as a reason for a lower-than-hyped opening, told clients Wednesday that a merger of WMG and EMI “would make sense financially (due largely to cost savings). However, it remains to be seen if either management team will be willing to cede control.” Her note keyed off a Sunday Times report that the two were preparing to resume on-again, off-again merger talks; two attempts have been spiked by regulators. The Times said EMI has lined up up Citigroup and UBS while WMG is working with Goldman Sachs and Lehman Brothers.
Cohen: “We have done a detailed analysis of the potential merger scenarios and our probability-weighted valuation suggests a fair value for WMG closer to $24 (7 percent downside from current levels). We see fair value of closer to $20 on a stand alone basis. Our analysis suggests that the most likely outcome (we assign an 80% probability) is a merger of equals that allows the companies to evenly split potential cost savings. An acquisition by either company at a significant premium would likely result in significant dilution of equity value for current shareholders.”

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