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BMG and Sony Music to merge

"In the end, the regulatory bodies will decide."

Rolf Schmidt-Holtz, chief executive of BMG

Bertelsmann AG and Sony Corp have agreed to combine their music divisions, becoming the latest partners in an industry roundelay that reflects the turbulent economics of recorded music.

The nonbinding letter of intent signed by Bertelsmann, the German media conglomerate, and Sony of Japan envisions a 50-50 venture to be called Sony BMG. It would create a stronger rival to the industry's leader, Vivendi's Universal Music Group, with 25.2 percent of the global market and a stable of stars varying from Britney Spears to the cellist Yo-Yo Ma.

The combination has echoes of a proposed joint venture of BMG and Time Warner Inc's music division, which foundered two months ago, when Time Warner decided to enter into talks with EMI Group Plc. EMI is close to lining up financing for a cash-and-share bid of up to US$1.7 billion for Warner Music, according to people involved in the proposal.

The prospect of a competing merger may have prodded Sony and Bertelsmann to move quickly, according to industry executives. In an announcement vague on details, one point was explicit: The deal hinges on approval from antitrust regulators in the US and Europe.

Many industry executives doubt the regulators would bless back-to-back mergers, which would shrink the number of major recording companies to three.

By announcing their deal first, Bertelsmann and Sony could increase their chances of approval -- or even scare off Time Warner and EMI.

"It's not a disadvantage to be first," said Rolf Schmidt-Holtz, the chief executive of BMG, who would be chairman of the new company. "In the end, the regulatory bodies will decide."

The European Commission has taken a hard line on music-industry mergers, quashing two in the last three years. Given that record, a person close to the commission said that filing first was an advantage.

Sony and Bertelsmann also plan to keep their music publishing units out of the joint venture -- removing one of the elements that provoked regulators in Brussels, Belgium, in judging previous mergers.

Fusing two troubled music giants will not solve their problems with piracy and the peer-to-peer sharing of files, which has devastated the industry in the last few years. But it would enable Sony and Bertelsmann to cut costs by combining sales and marketing offices in dozens of countries.

"We live in fragile, and for the record industry, very difficult times," said chairman of Sony Music Andrew Lack. "A partnership like this allows us to manage our way through the difficulties."

Lack, a former television executive who has cut a wide swath as a music mogul, would be chief executive of Sony BMG.

The speed of this deal surprised some people in the industry, who have become used to protracted negotiations that often end in failure. But analysts said the combination has an underlying logic.

"They have to consolidate because they can't afford the overhead," said Porter Bibb, the managing partner of Mediatech Capital Partners, a media investment firm. "When you have the specter of vastly reduced profits, there isn't enough room for five or six major companies."
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