Update: EMI, Time Warner Cancel Merger Plans - TheStreet

Updated from 8:41 a.m. EDT

In the face of tough scrutiny from European antitrust regulators,

EMI Group

and

Time Warner

(TWX)

ditched their plans for a merger that would have created the world's largest music group, the companies said Thursday.

The decision is likely to help

America Online

(AOL)

in its negotiations with regulators over its proposed $150 billion purchase of Time Warner, analysts said.

"It definitely could be perceived as a sacrifice Time Warner made" to appease regulators examining the AOL-Time Warner deal, said Scott Kessler, an analyst at

Standard & Poors Equity Group

who covers AOL. "EMI was one of the reasons the

European Union was concerned about in respect to this transaction." Kessler has a buy rating on AOL -- meaning he expects it to outperform the broader market over the next six to 12 months -- and his firm does not do underwriting.

Another analyst, David Readerman of

Thomas Weisel Partners

, said, "The EMI merger seems to have been a lightning rod for the EU's concern over the consolidation in the music industry." Readerman has a buy rating on AOL and his firm has no underwriting relationship with the company.

European regulators are expected to give an opinion on the proposed AOL-Time Warner deal on Oct. 24.

Time Warner and EMI withdrew their application from the

European Commission

, but will continue to work to find a solution that satisfies regulators in Europe and the U.S., the companies said in a statement.

The deal already appeared to be losing its luster when Time Warner and EMI reportedly offered to divest record label

Virgin Records

, one of the jewels of the EMI crown. "If they had to divest the key assets, it no longer made any sense to do the deal," said Hal Vogel, a fund manager at

Vogel Capital Management

.

EMI had also offered to divest some of its labels in France, Spain and Denmark, where it has high market shares, as well as some music publishers. Apparently, that wasn't enough to appease regulators.

"The withdrawal of our applications allows additional time to reassess regulators' concerns and to pursue solutions simultaneously in Europe and the U.S.," Eric Nicoli, EMI's chairman, said in a statement. "We have been, and will continue to be, flexible in responding to the European Commission's concerns. However, any concessions that are ultimately made must be consistent with our shareholder value objectives."

Richard Parsons, Time Warner's president, said, "Because of our confidence in this combination's potential ... we will continue to explore ways to structure a combination that will make sense for the two companies and be acceptable to the commission."

Time Warner finished Thursday regular trading up $5.24, or 6%, at $91.24, while AOL gained $2.85, or 5%, at $61.50.

Justin Dini contributed to this report.