Image: 030917britmad_vsm12p.jpg
Britney Spears, left, and Madonna share a kiss during the MTV Video Music Awards in New York last month. Soon the two pop icons may be working for the same company if Warner Music and BMG agree to merge.
By
CNBC
updated 9/17/2003 8:18:01 AM ET 2003-09-17T12:18:01

Remember that moment between Madonna and Britney Spears at this year’s MTV music-video awards? That warm, collegial embrace symbolizes the growing closeness of the record companies behind the two stars.

Warner Music Group executives are continuing merger discussions with their counterparts from Bertelsmann Music Group, even though an agreement to negotiate exclusively with each other expired Monday.

Warner Music Group, which features Madonna and Germany’s Bertelsmann, which releases Britney’s music, have been talking for months about combining their recorded music operations in a 50-50 joint venture.

Now all that separates them is something like $100-150 million — an amount Warner thinks BMG needs to kick into the merger to match the value of the Warner Music Group assets.

That sounds like a small amount of money considering the value of the proposed deal is estimated at $2-2.5 billion dollars.

“I think AOL to justify this transaction needs to pair it with a debt reduction story and I think … they want some payment from Bertelsmann,” said Paul Kim, an analyst at brokerage Kim & Company. “AOL Time Warner wants to get some cash out of this … so they can hit that $20 billion net debt number at the end of 2004.”

Waiting in the wings is EMI, the British record label behind acts like Pink Floyd and Radiohead. EMI has taken a run at both Warner Music and BMG in the past but failed to get anywhere. The company has since raised a bunch of money in the bond market, a sign to some that EMI may be gearing up to make another pass at Warner. This is all part of a broader consolidation wave rippling through the music industry as it grapples with a 3-year slump in sales.

Universal, the industry’s biggest player recently announced a 30 percent price cut on its CDs in an effort to lure consumers back into stores — but so far none of the other record companies have followed suit with price cuts of their own.

“Dropping from $17, $18, $19 to a suggested retail price of just under $13 is quite significant,” said David Mantell, an analyst with Loop Capital Markets in Chicago. “We do think it will help, but that alone will not be enough to stem the revenue decline.”

Analysts say Universal’s price cut could have a dramatic impact on the valuations investors assign to music companies, and that could be one of the issues in these current talks between Warner Music and BMG.

BMG is expected to decide whether to meet Warner’s terms sometime this week, which is why many expect to get a thumbs-up or thumbs-down on this merger pretty soon.

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