Sony Corp. became the sole owner of the world's second largest music company in the world Tuesday, putting the company in a position to integrate music with electronics and possibly begin to offer shared rights deals with artists.
Sony agreed to buy the 50% stake in Sony BMG held by German media giant Bertelsmann in a deal valued at $1.2 billion.
Sony BMG will initially pay Bertelsmann about $600 million in cash. Sony Corp. of America will then purchase the remaining interest for about $600 million. As a result, Bertelsmann will receive approximately $900 million in value for its 50% stake plus $300 million of its share of cash on Sony BMG's balance sheet. Sony views this arrangement as a net cash cost of about $600 million as it does not consolidate Sony BMG's cash.
The music company, to be called Sony Music Entertainment, will be a wholly owned subsidiary of Sony Corp. of America.
"This acquisition will allow us to achieve a deeper and more robust integration between the wide-ranging global assets of the music company and Sony's products, operating companies and affiliates," said Sony chairman and CEO Howard Stringer. "It enables us to offer a total entertainment experience to consumers."
Stringer's remarks suggest the artists and their repertoire will be used aggressively to sell the company's electronics products. The most obvious starting point is in the mobile devices produced by Sony's Ericsson unit, which has been an also-ran next to the music-driven programs pioneered by Verizon Wireless and Nokia.
Stringer added that in the past four years, Sony BMG has restructured, streamlined its operations and developed digital partnerships "that ensure it will continue to be a leader in the creation and distribution of music worldwide."
With a unification of recorded music, music publishing -- Sony/ATV was not part of Sony BMG -- and Sony's film and TV divisions, the company's labels would be in a position to bundle revenue streams into a single package for an artist. The so-called 360 deals generally tie recordings, publishing, merchandising and tour revenue under a single contract; EMI and Warner Music Group have executed a few of these deals but most have come from upstart labels or publishing concerns.
Connecting the different product lines has been a tough sell, however. Sony has struggled, and often flopped, in its attempts to offer consumer products related to its music; the most notable examples are the mini-disc, its online retail operation, the SACD and a recent gift card collection with codes for downloads.
In the four years since Sony and Bertelsmann merged their music divisions, there was considerable jockeying for power at the top of the company. Not a single top executive is still in the job they were assigned when the company was formed in 2004 with Sony's Andrew Lack at the top. BMG exec Rolf Schmidt-Holtz, initially chairman of the board, swapped positions with Lack in February 2006 and has been CEO of Sony BMG ever since.
Several of the company's labels -- Columbia, Arista, Epic and J -- have seen significant management changes; prior to the merger, Sony Music was regarded as the most stable of the majors.
At the time Sony and BMG merged, consolidation was seen as the lone path for the majors to survive. Universal had acquired Polygram five years earlier under Edgar Bronfman Jr.'s watch, and EMI and Warner started courting in 2000, leaving Sony and BMG as logical partners. But in recent years, the opposite tack has taken hold: Warner Music and EMI were taken private by investors groups, and Vivendi ditched its Universal holdings save for the music company. Sony Music will be the only major owned by a company with interests in film and television.
Bertelsmann, which sold its music publishing unit, BMG Songs, to Universal two years ago, will keep a toehold in the European music marketplace. It takes over a limited number of music catalog assets from Sony BMG in Germany, the U.K., France and Italy. Bertelsmann chairman-CEO Hartmut Ostrowski told employees in a memo that these assets "will form the basis for re-entry into the music rights business."
The parties will continue to share the company's manufacturing and distribution requirements between Sony's manufacturing subsid, Sony DADC, and Bertelsmann's services company, Arvato Digital Services, by extending agreements with Arvato for up to six years.
In his memo to staff, Ostrowski wrote, "The proceeds from the sale of our stake in Sony BMG create new latitude for us to make targeted investments and grow again, including and especially in North America."
No specifics were mentioned in the memo, but one potential target could be U.K. pay TV company BSkyB's 17.9% stake in ITV, Blighty's leading commercial web. Bertelsmann-owned RTL is reportedly eyeing the stake, which is likely to come on the market in the near future following a ruling by the U.K.'s competition commission.
Last year the BMG unit saw revenue fall 27% to $2.25 billion while operating profit dropped 46% to $144 million.
Sony Music now has an active roster that includes Pearl Jam, Alicia Keys, Bruce Springsteen, Justin Timberlake and Bob Dylan and the catalogs of Elvis Presley, Michael Jackson and Miles Davis.
News of the deal was greeted positively by investors. Sony Corp. of America stock rose 3.4% to close at $38.28 while Bertelsmann was up 2.2% to $180.96.
The deal remains subject to regulatory approval.
© Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.
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