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SONY & BMG to Merge?
November 06, 2003

Sony, BMG Plan to Create Second-Biggest Music Company
Nov. 6 (Bloomberg) -- Sony Corp. and Bertelsmann AG said they plan to merge their music units, creating the second-largest record company as piracy and declining demand erode sales in the $31 billion global industry.

The companies will each own half of the venture, to be called Sony BMG, Bertelsmann Chief Executive Officer Gunter Thielen said at a press conference in Berlin. The transaction is expected to close in two months, he said. Rolf Schmidt-Holtz, the 55-year-old chairman of BMG, would be chairman of the company, and Sony Music Chairman Andrew Lack, 56, would be chief executive. Both units are based in New York. Terms of the transaction weren't disclosed.

The combination would add Sony artists such as Bruce Springsteen and Beyonce Knowles to BMG, which distributes music by singers including Britney Spears, to create a company with a quarter of the worldwide market. Record companies in the past three years have been trying to merge as music sales slumped 20 percent to their lowest in more than a decade.

``The industry is going through tremendous difficulties, and mergers are the only way to cut costs,'' said Julien Raffelsbauer, an analyst at Bank of America Corp. in London.

Bertelsmann, based in Guetersloh, Germany, said in September the loss at BMG before interest, tax and amortization widened to 117 million euros ($134 million) in the first half from 45 million euros. Bertelsmann, Europe's second-biggest media company, held talks to combine with Time Warner Inc.'s Warner Music earlier this year, after failing to merge with the unit in 2000. It also failed in an attempt to merge with U.K. competitor EMI Group Plc in 2001 in the face of European Union regulatory hurdles.

EMI, Warner

Sony BMG would have 25.1 percent of the worldwide market, based on figures by International Federation of the Phonographic Industry. The combined group would be second only to Vivendi Universal SA's music unit. Earnings and revenue at the five largest record businesses have been hit by competition from other entertainment such as video games and by illegal downloading of songs from the Internet.

The combination of BMG, currently the fifth-biggest record company, with Sony Music would probably compromise an attempt by EMI Group Plc to buy Time Warner Inc.'s Warner Music, lawyers have said. Antitrust regulators are unlikely to approve two mergers in the music industry, where the five dominant companies own three quarters of the market, analysts said.

``The regulators have it in their hearts to let only one merger to go through, and my feeling is it's the first to the post that will go through,'' said Kingsley Wilson, an analyst at Investec Securities who has a ``buy recommendation'' on EMI.

EMI shares fell as much as 4.6 percent to 171.75 pence and traded at 177.75 at 4:21 p.m. in London. The stock, the best gauge of the industry because EMI is the only publicly-traded company to focus on music, has lost more than two-thirds of its value in three years.

Seeking Mergers

Bertelsmann reshuffled BMG's management in 2001 after a failed attempt to merge with EMI. BMG slashed about 1,100 jobs in 2001 and sold its Bad Boy Records label, run by Sean ``P. Diddy'' Combs, to save costs.

The BMG unit last year bought Zomba Music Group for $2.75 billion, adding singers Busta Rhymes, Justin Timberlake and Britney Spears to its acts.

Tokyo-based Sony, the world's second-largest consumer- electronics maker, in January also embarked on a plan to overhaul its music unit, which accounts for about 7 percent of the company's overall revenue.

Lack, formerly the president and chief operating officer of General Electric Co.'s NBC television unit, was hired to replace Thomas Mottola, who signed acts such as the Dixie Chicks and Jennifer Lopez.

Sony Music Revamp

Sony also said it would eliminate 1,000 jobs at the music business worldwide, or 10 percent of its workforce, in a move aimed at saving $100 million a year.

Sony executives have promised to turn the business around and tap the growing demand for music delivered legally over the Internet, a market that will be worth $2 billion by 2007, Sony Corp. of America CEO Howard Stringer said this week.

Worldwide record music sales will continue to drop in the next two years, according to the Music Week World Report 2003. Revenue is expected to fall 6 percent in 2003 and 2.1 percent in 2004, the report said.

EMI, based in London, has lined up debt financing for a bid of as much as 1 billion pounds ($1.67 billion) in cash and shares for Warner Music, the Financial Times reported today. EMI officials didn't immediately return calls seeking comment.

Global music market share (percentage)

2002 2001
Universal Music Group 25.9 23.7
Sony Music 14.1 14.6
EMI 12 13.1
Warner Music Group 11.9 11.9
BMG 11.1 8.1
Independents 25 28.6

North American market share (percentage)

2002 2001
Universal Music Group 32 28.3
Warner Music Group 14.9 14.4
Sony Music 14.7 14.4
BMG 13.6 8.9
EMI 8.9 10.1
Independents 16 23.8

Source: International Federation of the Phonographic Industry
annual yearbook

Last Updated: November 6, 2003 11:43 EST


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