Vivendi to buy BMG, settles Napster claims
Wed Sep 6, 2006 7:13 AM ET

By Jeffrey Goldfarb

LONDON (Reuters) - Vivendi's Universal Music, the world's largest seller of recorded music, is vaulting to the top spot in music publishing, too, after agreeing to buy BMG Music Publishing for 1.63 billion euros ($2.1 billion).

German media conglomerate Bertelsmann AG , BMG Music Publishing's parent company, also said on Wednesday it would pay Vivendi $60 million to settle litigation related to financing it once provided to file-sharing service Napster.

Vivendi , the French media and telecoms group, topped offers from six other bidders for BMG Music Publishing, which owns the rights to thousands of songs, including ones by Coldplay, Christina Aguilera and Barry Manilow.

It had been seen as a frontrunner in the auction since it was tipped Bertelsmann would sell BMG earlier this year. Other bidders included Warner Music Group and a team that included media conglomerate Viacom Inc. and private equity firm Apollo, sources familiar with the situation said.

Publishers have been increasingly coveted by investors because they are partly shielded by many of the piracy issues that have rattled the music industry. In addition to generating revenue when CDs or downloads are sold, music publishers make money by licensing songs to be performed live and for use in films and television shows.

"The acquisition of BMG Music Publishing is a unique opportunity to grow our music publishing business and enhance the value of Universal Music Group at a time when the music market is improving, supported by technological innovations and digital sales," Vivendi Chief Executive Jean-Bernard Levy said.

Vivendi's shares were down 0.2 percent to 27.10 euros at 1024 GMT. The company was advised by Merrill Lynch on the deal.

Bertelsmann, which is selling its music publishing arm to help fund the 4.5 billion euro buyback of a minority stake in the company, said the agreement would increase its net income by about 1 billion euros.

BMG, the world's third-largest music publishing company, had 2005 revenue of 371 million euros, accounting for about 2 percent of Bertelsmann's total.

The deal price represents about a 9.6 multiple on BMG's net publishers share (NPS) of 170 million euros. NPS, which measures the amount of royalties retained by a publisher, is the sector's most closely watched cashflow figure.

The multiple is lower than has been paid for other music publishers, although previous deals have been for much smaller companies such as Acuff-Rose and DreamWorks. Also, under copyright laws more songs are reverting back to songwriters or their heirs, reducing the future earnings of many catalogs.

The BMG deal has been approved by the boards of both companies and is likely to be reviewed by competition authorities in both the United States and Europe.

'STRANGE AURA'

Bertelsmann, which was advised by Citigroup and J.P. Morgan, said it expected to be paid by the end of the year. It had said in July that it would not bear any anti-trust risk from the sale, but declined to comment on the subject on Wednesday.

A European court this summer annulled 2004 EU approval of the merger that created Sony BMG, a recorded music joint venture between Sony Music and Bertelsmann's BMG, creating uncertainty about how much consolidation will be allowed in the industry.

"In the ordinary course of things there shouldn't be any competition concerns, but because it's music, the Commission has to look carefully at these cases," said another person familiar with the situation who asked not to be identified.

"There is a strange aura about this one," the source added. "This will be tricky."

A fresh review of the Sony BMG case by European competition authorities is also likely to run concurrently with the scrutiny of the BMG Music Publishing deal.

The EU said it would look carefully at the BMG Music Publishing deal if it was notified.

Meanwhile, the Napster settlement ends one piece of three-year-old litigation against Bertelsmann, which is being sued by various music companies for allegedly contributing to copyright infringements by granting loans to Napster, thus enabling it to survive longer than it otherwise would have.

After it launched in 1999 and became the first widely used peer-to-peer service, Napster almost single-handedly forced the music industry to revamp its business model when millions of consumers started swapping songs instead of paying for them.

It was eventually shut down by the courts, but was later reborn as a legal music service as the industry began to embrace the file-sharing technology behind Napster and others.

Bertelsmann said it was not admitting any liability as part of the settlement.

"We believe the resolution is a fair one to both parties," Bertelsmann Chief Financial Officer Thomas Rabe said.