No matter what happens to EMI or Warner Music Group (WMG), it always seems that speculation about their respective fates is intertwined with that of the other.

That was true during the protracted will-they-or-won't-they merger speculation that had surrounded the two major-label groups until British private-equity firm Terra Firma acquired EMI in 2007. And it's true now as the private-equity firms that own a majority stake in Warner contemplate whether to cash out or double down on the music business.

Warner has hired Goldman Sachs to solicit buyout offers from potential acquirers for all or part of the major-label group. At the same time, Warner insiders insist they remain interested in bidding for EMI if its owner Terra Firma loses control of the company to creditor Citigroup later this year. Representatives at Thomas H. Lee Partners, Bain Capital and Providence Equity Partners -- which own a combined stake of about 60% in Warner -- either declined to comment or didn't respond to interview requests. Their next move -- or at least the timing of it -- could be determined by what happens at EMI.

If, as expected, Terra Firma fails to meet an undisclosed ratio of debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization), plus cash on hand, for the quarter ending March 31, it would be in technical default of its Citigroup loan, which it took out to buy EMI. The private-equity firm would have until about mid-June to "cure" the shortfall by securing a cash infusion from its investors. If it fails to do so, Citigroup would be able to take control of EMI from Terra Firma.

Unless Citigroup indicates that it's willing to restructure Terra Firma's debt, it's highly unlikely that the EMI owner will be able to convince its investors to pony up an additional equity infusion, according to a source familiar with the situation. Given the way things are headed, the source says, Citigroup has been putting out informal feelers to parties with a potential interest in buying all or part of EMI.

With an eventual Citigroup takeover of EMI looking increasingly likely, the decision by Warner's private-equity owners to put the company in front of potential suitors now ensures that its Warner/Chappell music publishing division will be up for bid before EMI Music Publishing. The timing is important because EMI is the world's largest music publisher, which could hurt Warner/Chappell's valuation if they were both up for sale at the same time.

The wild card is BMG, the music publisher jointly owned by German media conglomerate Bertelsmann and private-equity firm Kohlberg Kravis Roberts, which put Warner into play by approaching the private-equity owners about buying the major. Industry observers expect that BMG will wind up with at least some of the assets of Warner or EMI -- whether they be all of Warner/Chappell or EMI Music Publishing, a portion of their publishing assets or possibly even catalog master recordings from either label group.

In regards to a potential merger of all of WMG and EMI Group, industry observers have long expected that U.S. and European regulators would block a merger without requiring some asset spinoff. But they might take a more liberal view of a major-label group combination than before, according to Anil Narang, a partner at MKM Capital Advisors and a former Alliance Entertainment CFO involved in that company's formation through a roll-up of music wholesalers in the '90s.

"The music industry is like a melting ice cube, with companies trying to figure out how to remain profitable," Narang says. "In this kind of environment, the regulators need to play the role of facilitator and help the industry make money rather than fending off a monopoly."

Warner's share price surged 27% on Jan. 21 to close at $6.01 a day after initial news reports that it was mulling a possible sale or merger with EMI. But the stock's subsequent performance, closing Jan. 27 at $5.54, indicates that Wall Street is far from certain that a deal will take place. Representatives for Warner and EMI declined to comment.

"Investors are somewhat skeptical that this kind of deal can be pulled off without any major hitches," says Tuna Amobi, media and entertainment analyst at Standard & Poor's Equity Research.

A sale of WMG appears unlikely to happen on its own, Amobi says. "Considering the music industry's prospects, WMG is not your ideal takeout situation," he says. "There are a number of scenarios in which a WMG deal could play out, but I don't see any resolution independent of EMI. What would make it more attractive is if they could identify economies of scale that could accrue from the EMI situation."

A buy-side Wall Street equity analyst who asks to remain anonymous agrees that an acquisition of Warner would only be attractive to a potential acquirer if it were paired with a takeover of EMI. "Until the industry learns how to drive growth again," he says, "most earnings will come from unlocking redundancies."

This article appears in the February 5 issue of Billboard magazine.