Sony Buys the Rest of Ailing Sony BMG

With Bertelsmann selling its 50% stake, the renamed Sony Music Entertainment will forge ahead as No. 2 in a troubled global music industry

In a world of declining values for just about everything, probably the toughest thing to sell is a music company. Who wants to buy into a business where U.S. sales have fallen by 45% in the last eight years and CD sales—still the industry's main business—have dropped another 16% so far this year?

Turns out that Sony Corp. (SNE) is still buying, as witnessed by its $900 million deal on Aug. 5 to take the other 50% of its joint venture, Sony BMG Music Entertainment, off the hands of partner Bertelsmann.

"I am very pleased," Sony Chief Executive Officer Howard Stringer told employees in an e-mail announcing the deal to his troops. He told them the company would be renamed Sony Music Entertainment and that he's counting on the new company to continue striking deals to deliver its music to digital outlets and to "provide a deeper integration between the music company and Sony's [consumer electronic] products."

A Relatively Nice Price

But Stringer's optimism belies the fact that Sony BMG hasn't been hitting it out of the park of late. The company swung to a $49 million loss in its most recent quarter, down from earnings of $21 million a year earlier, on lower sales of $820 million.

Bertelsmann, which like Sony had an option next year to make an offer for the other's interest, seemed to want out of the business. The deal is complicated: Sony will give Bertelsmann $600 million in cash and half of the $600 million in cash the music company has on its books. But this equates to a purchase price of only about 4.5 times the company's 2008 earnings before interest, taxes, depreciation, and amortization, or EBITDA, reckons Pali Research analyst Richard Greenfield. He points out that publicly owned Warner Music Group (WMG) trades at a multiple of seven times its EBIDTA. (This includes WMG's music-publishing unit.)

Since the merger of Sony and BMG in 2003—a deal that Stringer said at the time represented "a bold move to reinvent and revitalize the music industry in the 21st century"—the joint venture has spent much of its time cutting costs. In April, Sony BMG moved legendary artist-finder Clive Davis out of his role as head of the company's music labels, making him chief creative officer. And Greenfield estimates that Sony will likely save more than $400 million by merging its Japanese music unit with Sony BMG's labels in Japan.

Star Power

So, where's the deal's upside? The company still has a powerful lineup of stars, including Bruce Springsteen, Justin Timberlake, Celine Dion, and Alicia Keys. Under CEO Rolf Schmidt-Holtz, who will continue to run the company from Hamburg, Germany, the company has struck deals with such digital download sites as Yahoo! (YHOO), MySpace (NWS), Nokia (NOK), and Mozes, and Stringer said they will be supplemented by "more to come." According to Stringer's e-mail, the company "generates sound profits, maintains a consistent No. 2 ranking in the global marketplace, and is positioned for growth in the digital area."

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