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CANNES, France (Reuters) - Universal Music Group, the world's largest music company, is working on a bid to buy British rival EMI, home to Katy Perry and Coldplay, a source familiar with the situation told Reuters on Thursday.
Universal's owner Vivendi backed the plan, the source added.
EMI, was put up for sale earlier this week by Citigroup, which took control of the ailing firm in February after its previous private equity owner Terra Firma defaulted on a loan.
Analysts had previously thought regulators would block any deal by Universal to buy EMI, the world's fourth-largest music company, after European regulators objected to consolidation among other major music groups.
However, the industry has since endured a torrid time, with many music retailers going out of business and millions lost to online piracy.
Smaller independent labels, which had previously joined forces to object to consolidation amongst the largest companies, have also increased their market share in recent years, while EMI's has fallen.
"They're in the frame," the source said of Universal. "The will is there, and a data room should be set up fairly soon. They believe Vivendi are supportive, as they realize this is the last game-changing acquisition to be made."
Universal's last major acquisition was the purchase of BMG Music Publishing, which it bought before applying for regulatory approval. It then agreed with the European Commission to sell certain assets to secure its clearance.
If Universal tried the same approach with EMI, it would probably have to sell EMI's lucrative publishing arm and possibly other recording assets in certain markets.
Analysts estimate that EMI could be sold for between $2.5 billion and $4 billion, after it reduced costs in recent years. It can also boast a strong classical division and a catalog that includes the Beatles and Kylie Minogue.
Other suitors are likely to include Warner Music Group, which has long been seen as a natural partner for EMI, and billionaire media investor Alec Gores has also been linked to the firm in media reports.
Universal and Vivendi declined to comment, while Warner and Gores were not available to comment.
(Reporting by Kate Holton; Editing by Will Waterman)
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