Warner, EMI Still Dancing

Observers expect EMI to make a higher bid.
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Warner Music Group

(WMG) - Get Report

will keep its door open to future advances from recently jilted suitor


, sources say, but the company is in no great hurry to cut a deal.

Warner Music has picked up about 5% since the company on Wednesday morning rejected a $4.2 billion cash-and-stock bid by London's EMI. Now, EMI is likely to put together a new bid for the company, according to sources, continuing a long dance between the two sides.

But some people say the significant cost savings to be gained from a deal might prompt Warner to bid for EMI.

In the interim, more dialogue between the companies will likely fuel Wall Street chatter that Warner's private equity backers are looking to sell. Thomas H. Lee owns close to 38% of outstanding shares, while Bain Capital owns more than 16%, Providence Equity Partners some 8% and CEO Edgar Bronfman Jr. about 11%.

At EMI's Monday cash-and-stock offer of $28.50 per share, Tom Lee would stand to make over $1.6 billion. Bain Capital would reap $670 million, Providence some $340 million and Bronfman $460 million.

Bronfman's group bought Warner Music more than two years ago from

Time Warner


, which was intent on shedding what it deemed noncore assets to raise cash and pay down debt.

The bid by EMI has been long anticipated by investors and analysts on both sides of the Atlantic. A combined EMI and Warner Music would allow the new company to better compete with Vivendi's Universal Music and Sony BMG. It would also grow EMI's presence stateside, something the company has long hoped to do.

Seeing heavy returns on their investment in the last two years, Warner's backers may feel that now is the time to get out. At very least, the equity interests are in the enviable position of waiting to see what happens after Warner Music reports first-quarter results Friday.

Analysts including Soleil's Laura Martin say it "makes a lot of sense for these two companies to be together," although she cautions that any deal will still face regulatory scrutiny in Europe. Martin and her firm don't own shares in WMG.

In the meantime, EMI has now tried to sidle up to Warner music three times. The first attempt came in 2000, around the time of the Time Warner merger with AOL. The EMI-Time Warner deal was scuttled by European regulators. The second came when Time Warner auctioned off Warner Music in 2003. In that instance, EMI was outbid by Bronfman & Co.