Bertelsmann to Acquire Rest of Zomba Music for $3 Billion

Zomba Music, the U.S. creative powerhouse that has churned out stars from Britney Spears to ‘N Sync, said Tuesday it was selling out to German media group Bertelsmann in a deal worth close to $3 billion.

Cashing in on an agreement that could boost Bertelsmann’s BMG music arm into the world’s top three music giants, Zomba exercised an option to sell BMG the shares it does not already own in its leading independent business.

In addition to pop princess Britney, Zomba will add acts such as the Backstreet Boys, crooner Michael Bolton and rapper Mystikal as well as a library including blues legend Buddy Guy to BMG’s roster. But it comes at a hefty price.

BMG, currently last among the world’s five major music groups whose own artists include pop stars Alicia Keys and Pink, already owns 25% of Zomba’s music publishing division and 20% of its record division. Bertelsmann said in its recent annual report Zomba’s option was worth some $3 billion.

“While the exercise of this option will undoubtedly be a surprise to many in the music industry, this is a natural culmination of many years of close business ties and a complex series of agreements negotiated 12 years ago,” Zomba’s chief and founder Clive Calder said in a joint statement with Bertelsmann.

At the height of the boom in the 1990s, Calder agreed the “put” option to sell the remainder of Zomba to BMG some time this year. Calder’s decision to exercise that option immediately raised questions over whether he would stay at the company he founded and which now ranks as the top independent music house.

Calder, 55, has been key to Zomba’s success since setting up the company in 1975, playing a large role in discovering and developing its top acts signed to labels such as Jive and Mojo.

While figures for Zomba are not made public, it has some of the best margins in the industry. Analysts estimate it makes a profit of around $300 million on $1 billion in sales.

Meanwhile, BMG has historically suffered some of the lowest margins after years of management in-fighting, a dearth of hits and monster losses. But it has started to show signs of a turnaround after a radical shake-up last year.

BMG said it was not immediately clear where it would rank among the top five music majors after the acquisition, especially given a lack of global data on the industry.

Analysts estimate BMG had an 11% global market share in 2000, ranking last after EMI with 12%, Warner Music with 13%, Sony with 16% and Universal Music with 22%. Meanwhile, analysts estimate Zomba had a global market share of 5%.

“Over the years, I have admired Zomba’s impressive results, which are perhaps the most spectacular in the industry. We are very excited about its future prospects and it will definitely strengthen our music business,” Bertelsmann chief Thomas Middelhoff said.

Some analysts suggested that the Zomba deal would limit Bertelsmann’s ability to do long sought-after deals in publishing and television empire.

Bertelsmann has been sitting on a $6.75-billion cash pile from the sale of a savvy investment in AOL Europe, but will have spent a large part of that buying out a partner in pan-European broadcaster RTL Group as well as Zomba.

To help fund the Zomba acquisition, Bertelsmann said last week it was planning to raise up to 1 billion euros in a bond.

The two companies made no mention of a price for Zomba in their statement. However, Bertelsmann said in its annual report the $3-billion price tag would be verified by due diligence.

A $3-billion price is equivalent to the market value of EMI which had once planned to join forces with BMG before regulators made clear they would not put up with a merger.