EMI’s leading shareholders are split over a potential deal with Warner Music, which has rejected an offer by the UK music group valuing its US rival at $4.2bn.

The US music group, whose artists include Madonna and James Blunt, rejected a cash and shares offer from EMI valued at $28.50 a share. It is the third attempt in six years by Eric Nicoli, executive chairman of EMI, to combine the two groups.

EMI is likely to consider increasing its offer, which is expected to be funded by a rights issue. One shareholder said a deal had industrial logic but another said he was “particularly unenthused about funding a deal with a massive rights issue”.

Warner Music said its board had unanimously rejected EMI’s proposal within 24 hours because it was not in the best interest of shareholders. One person familiar with its deliberations suggested EMI’s offer did not represent a significant premium to Warner’s market price. Warner’s shareholders would also prefer an all-cash offer, this person said.

One senior member of the Warner Music consortium said the price of a takeover by EMI would “at least” have to be above $30 a share. A merger would create $400m-$500m in cost savings. “There is huge value to be created here – they know it and we know it,” said the person, who declined to be named.

About 75 per cent of Warner shares are controlled by Mr Edgar Bronfman and a group of private equity investors, including Thomas H Lee Partners, which acquired the music business from Time Warner two years ago for $2.6bn. Since then, they have cut more than 1,000 jobs, recruited new managers and emphasised digital distribution.

The EMI offer could herald a broader restructuring in the global music industry. Bertelsmann, the German media company, is considering selling its music publishing business – and possibly its interest in its Sony-BMG joint venture – in order to raise cash to buy back the 25.1 per cent stake held by Groupe Bruxelles Lambert.

Any deal between EMI and Warner would probably require the sale of one of their music publishing businesses to satisfy regulators. Warner Music shares were up 2.6 per cent at $28 in midday New York trading, while EMI shares closed down 11½p at 270½p in London.

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