BREAKING NEWS: EMI AND WMG ENGAGED IN A SERIOUS GAME OF "LET'S MAKE A DEAL"

Will the third time be the charm for EMI and Warner Music Group?

EMI confirmed Wednesday morning that negotiations with WMG have been going hot and heavy this week, with Warner turning down an initial offer of $28.50 a share, in a combination of cash and stock. The offer, which adds up to about $4.2 billion, was characterized by a source close to the matter as "less than impressive," according to Reuters.

But the British company indicated it intends to continue pressing for a deal. "The Board of EMI continues to believe that an acquisition of Warner Music by EMI would be very attractive to both sets of shareholders but will only pursue a transaction that delivers enhanced value and earnings accretion to EMI shareholders," the company said in a statement circulated by SVP Corporate Communications Jeanne Meyer.

The statement (reprinted in full in Rumor Mill) confirms a Tuesday CNBC report that EMI Group Chairman Eric Nicoli was in New York meeting with his WMG counterpart Edgar Bronfman Jr.

Insiders say the number Bronfman wants to hear is somewhere north of $5 billion—as much as $3 billion more than the $2.6 billion the present owners paid for the company in 2003.

This jaw-dropping profit would represent a huge windfall for Thomas Lee Partners and the other members of the investment cartel organized by Bronfman to buy WMG, and if EMI agrees to such an amount, Wall Streeters will conclude that Time Warner chief Dick Parsons got taken by unloading the asset at what now appears to be a bargain price.

Most expect that the deal will clear the EU hurdle, which had thwarted the two companies in their attempt to merge in 2000. (In its second try three years later, EMI was outbid by Bronfman, et al.) Assuming the two companies can reach such an agreement, Nicoli will run the show, and Alain Levy will head up the recorded music operations of the combined companies.

With Thomas Lee Partners and the rest of the Warner investment cartel walking away with their profits, the question arises: what will happen to Bronfman? Will he be given a non-executive role on the WEMI board, take his chips and go home or make another music play? In the latter scenario, of course, potentially available music assets are now down to a precious few.

In order for Bronfman or any other party to acquire Bertelsmann's half of Sony BMG, Sony Corp., which has the first right of refusal, will either have to pass on the acquisition and/or sell its half as well. But most believe Sir Howard Stringer will buy Bertie out. Otherwise, the biggest potential plums are EMI Music Publishing and Warner/Chappell, one of which will have to be divested in order for the EMI-Warner deal to pass regulatory muster, along with BMG Music Publishing.

EMIMP and WCM have long been the two most profitable publishing companies in the business, and publishing is the sector of the music industry least affected by changes in the marketplace, so Bronfman would have to take his place in a long line of prospective buyers willing to fork up record prices for one or the other—a queue that is rumored to include exiting EMIMP Chairman Marty Bandier, along with a herd of Wall Street bulls.