Monday, July 21, 2008

Sony BMG Music's days are numbered

The clock is quickly ticking down on a process that could see German media giant Bertelsmann sell its 50% stake in Sony BMG Music Entertainment tojoint-venture partner Sony Corp in the coming months.

Sources say the Sony board will meet July 29 to discuss the future of the 4-year-old venture, whose artists include Britney Spears, Bob Dylan and the Foo Fighters. The combo is due to expire next August.

Bertelsmann's 12-person supervisory board convened in early July to examine the possibility of an exit. Although the closely held company had originally considered a target sale price of about 1.8 billion euros ($2.8 billion), the difficult economic climate and tough credit conditions mean that a price tag closer to a meager 1 billion euros ($1.5 billion) is far more likely.

Since Hartmut Ostrowski assumed the post of Bertelsmann CEO January 1, he has sounded a "go for growth" battle cry. Bertelsmann's move out of recorded music is part of a broader effort to exit businesses that don't fit Ostrowski's high-growth focus. In a related move, the company said July 11 that it agreed to sell its Direct Group North America unit to Najafi Cos., a Phoenix-based private equity firm.

Sony appears to be the only serious party interested in acquiring Bertelsmann's stake. Unlike EMI Group, which British private equity fund Terra Firma acquired last year for 2.4 billion pounds ($4.7 billion), Sony BMG doesn't include a lucrative music publishing business that might attract other private equity bidders.

Drew Lipsher, a partner at venture-capital firm Greycroft Partners in New York, says Sony's buyout of Bertelsmann's stake is a necessary move if the Japanese electronics giant is to have any hope of building its music business.

"By controlling the whole show, they stand a chance," Lipsher says, noting that "a single parent with a single perspective is better-positioned to make far more aggressive and, especially over the short term, unpopular decisions."

A Sony Corp. spokesman in New York declined to comment. A Bertelsmann spokesman says only that the company continues to mull three possible scenarios: a sale of its BMG stake, the buyout of Sony's stake or maintaining the status quo.

Any spinoff of Bertelsmann's stake would also have to be approved by U.S. and European regulators, who could raise concerns about vertical integration at Sony, given that its hardware business includes a joint venture with handset giant Ericsson for Walkman music-enabled mobile devices. Another potential sticking point: octogenarian billionaire Reinhard Mohn, whose family owns a controlling stake in Bertelsmann, is understood to be keen on retaining German repertoire label Ariola.


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