Sony buys out Bertelsmann’s stake in Sony BMG

August 5, 2008

Beyonce and Justin Timberlake(Updates earlier post to clarify deal terms)

After four years of recriminations and in-fighting between executives from Sony Music and executives from BMG Music Entertainment, Tokyo-based Sony Corp has decided to end the mutual pain of a controversial merger and take full control of Sony BMG.

Artists like Beyonce, Bruce Springsteen and Justin Timberlake will now record under a new banner: Sony Music Entertainment Inc.

The FT had reported in June that Bertelsmann was looking for $1.2 billion-$1.5 billion for its 50 percent stake in Sony BMG, but it looks like the German media company settled for $600 million-$900 million — the exact sum depends on how you do the math.

Basically, Sony said it is paying $600 million cash to Bertelsmann, which will also get half of another $600 million in cash on Sony BMG’s balance sheet for a grand total of $900 million. The deal values Sony BMG at $1.2 billion. (UPDATE: You can argue that half of Sony BMG’s cash belonged to Sony, so its total cost was $900 million but Sony says it hadn’t consolidated Sony BMG’s cash. Bertelsmann adds that the value to it was higher than $1.2 billion, after taking into account tax breaks)

Will full ownership by Sony give the record label a new lease on life? According to Music & Copyright research, Sony BMG ranks second in the music industry with a 20.1 percent market share, behind Universal Music’s 28.8 percent. Here’s what some analysts told our correspondents in Tokyo and London:

Daiwa Institute of Research analyst Kazuharu Miura

Sony BMG is a company whose sales have been on a declining trend. But it has managed to post profits so far thanks in part to its restructuring efforts. There is no reason to see this as particularly negative. But I don’t think this is something that prompts investors to chase Sony shares, either.
Sony’s cash out is $600 million, while Sony BMG has been posting after-tax profit of about $100 million to $200 million. Of that profits, Bertelsmann’s portion will come to Sony after the deal. So, Sony can expect a return of about $50 million to $100 million for a $600 million investment. That is not a bad

Informa music analyst Simon Dyson

It would appear that Bertelsmann was getting out of the music industry altogether but actually they’ll still deal with some management and rights, which signals that they think there’s money to be made, just not in retail.
I’m probably a little more pessimistic than most people. I’m very sceptical as to whether music sales are going to return to growth for a good five or six years.
Sony is big in music and games, for example with Guitar Hero, for which artists seem keen to sign up. I wouldn’t think that actually owning the music company would need to be a part of it.
BMG on the surface seems to have got the most out of it. But they’re very clever people at Sony, perhaps they’ve got some kind of plan.

Jupiter music analyst Mark Mulligan

This is absolutely related to the fact that the music industry is in a really difficult time. But it has much if not more to do with Bertelsmann refocusing itself. What Bertelsmann really created was a cross-media megalith, trying to do too many things across too many areas. Owning everything isn’t necessarily the best way of getting the most out of a media company.
The timing and the importance of getting this done has been intensified by the state of the music industry. The music industry’s declining but some time in the next couple of years the decline will slow. Digital music sales will ultimately catch up with the rate at which CD sales are declining.

(Photo: Reuters)

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