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Time Warner negotiates music unit sale with Bronfman
( 2003-11-21 10:12) (WSJ.com)

An investor group led by former Seagram Co. CEO Edgar Bronfman Jr. emerged Thursday as Time Warner Inc.'s preferred candidate to buy Warner Music Group, beating out EMI Group PLC and giving Mr. Bronfman a chance to re-establish himself as an entertainment mogul.

As CEO of liquor-and-entertainment giant Seagram, Mr. Bronfman built Universal Music into the world's biggest music company. But he sold Seagram to Vivendi SA three years ago in a stock deal that turned out to be disastrous for Vivendi shareholders, including the Bronfman family.

Vivendi started to unravel last year under the weight of a huge debt load and numerous acquisitions, slashing its stock price. Mr. Bronfman tried unsuccessfully to buy back Vivendi's U.S. entertainment assets but lost out to General Electric Co.'s NBC. Buying Warner Music will now give Mr. Bronfman a chance to win back the fortune he lost.

Still, assuming Mr. Bronfman's group can get a final deal negotiated, he faces a tough challenge at Warner Music. Global music sales have been declining sharply for the past few years, under pressure of piracy, and the industry has embarked on an unprecedented level of cost-cutting and consolidation. Many industry executives believe the big music companies need to merge to achieve cost-savings necessary for survival. Mr. Bronfman's group, which also includes Thomas H. Lee Co. and billionaire investor Haim Saban, will have to find ways to cut costs at Warner Music without the benefit of a merger with another company. Just a few weeks ago, Sony Corp. and Bertelsmann AG agreed to merge their recorded-music businesses.

After a day-long Time Warner board meeting that considered both offers, the media giant told Mr. Bronfman's group late Thursday afternoon that the group had until the end of the weekend to negotiate a final deal. The group has offered about $2.5 billion for both Warner's recorded-music operations and its music-publishing business. If Time Warner can't reach a deal with the Bronfman group by Sunday night, it may go back to EMI. The U.K. company offered up to $1 billion in cash and an equity stake of 20% to 25% in EMI for Time Warner's recorded-music operations.

The decision suggests that Time Warner Chairman Richard Parsons opted for a deal that could be worth a little less in price but which will likely be completed within a couple of months. EMI's offer faced tough and lengthy regulatory scrutiny in both the U.S. and Europe, which meant Time Warner wouldn't know for sure if the deal could close for perhaps a year . The chances of antitrust regulators approving a Warner-EMI deal had also receded dramatically since Sony and Bertelsmann announced their deal. Many people at Time Warner had concluded in recent days that the Sony-Bertelsmann deal almost certainly doomed the chances of a Warner-EMI deal being approved. Now that there likely won't be two competing music mergers, regulators may give the Sony-BMG proposal a slightly easier ride.

Time Warner may end up keeping a stake in Warner Music. Mr. Parsons had been keen to keep a minority stake, in case the music industry turned around in coming years and Time Warner decided to re-establish itself in the industry. EMI's offer had included such a provision but the Bronfman group's offer also gave Time Warner the option to retain a minority stake, according to a person close to the situation. Other investors in the Bronfman group are Providence Equity Partners, Bain Capital and Quadrangle Group.

The music industry will likely be abuzz about who would run Warner Music in the event the Bronfman group seals a deal. Mr. Bronfman remains very close to the management team of Universal Music, led by Doug Morris, as he oversaw that business but he may also choose to keep Roger Ames, the current head of Warner Music.

Time Warner's decision is particularly bad news for EMI, which now looks like it will strike out for the third time in recent years in its attempts to find a merger partner. EMI is the only one of the big music companies to be solely focused in music and it has been hurt hard by the downturn in the industry. EMI Chairman Eric Nicoli acknowledged Thursday's development in a statement Thursday night, saying "Time Warner has tonight informed us that they are now considering a possible proposal from another party as an alternative to our own firm offer."

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