WMG’s Shares Go Up, Speculations Of EMI Merger

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Shares of Warner Music Group rose 11 percent after Citigroup upgraded the world’s third-largest music company on valuation, fueling further speculation of a deal with rival EMI Group.

The brokerage raised the stock two notches to “buy,” given the company’s ability to generate significant free cash flow coupled with the potential to cut costs if a tie-up occurs between the company and EMI.

EMI has been the subject of merger speculation with Warner Music as the two look to close the gap on their larger rivals Universal Music Group and Sony Corp’s Sony Music Entertainment.

Warner Music could probably find about $230 million in cost savings by combining recorded music operations, analyst Jason Bazinet said, raising his price target on the stock to $6.00 from $2.50.

Warner Music’s capital raise earlier this year lowers covenant pressure, favoring the “much vaunted tie-up” with London-based EMI, which was bought by private equity firm Terra Firma in 2007, Bazinet said.

Since the deal close, Terra Firma has been injecting cash into the firm to prevent EMI from violating debt covenants.

“Without some financial flexibility on the part of the banks, Terra Firma may be forced to sell its recorded and publishing business to other players in the industry,” he said.

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Source: Reuters

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