Sony Unit, BMG Said to Be Set on Merger

Sony Corp. and Bertelsmann plan to announce today that they have signed a letter of intent to merge their music businesses, according to people familiar with the matter.

The union of Sony Music Entertainment and Bertelsmann’s BMG would create a jointly owned venture with an estimated 25% of global music sales, positioning it just behind industry leader Universal Music Group.

The Japanese and German companies have been in high-level talks for several weeks. In fact, all of the world’s five major record companies have been exploring sale or tie-up deals as they aim to stay afloat in a business that in the last three years has suffered a roughly one-quarter drop in sales.

The pact signals that talks between Sony Music and BMG have intensified. But deal makers still must resolve several key issues, including which company would have operating control, before the letter of intent could advance to something more.

Antitrust regulators frowned on two earlier merger efforts in the music industry, first when EMI Group and the record label owned by Time Warner Inc. sought to merge and then, two years ago, when EMI tried to hook up with BMG.

But senior executives at most of the major record companies believe that the rise of digital piracy and other shifts in the marketplace now make it more likely that European and U.S. officials will approve a music marriage.

Indeed, some insiders say a Sony-BMG pact may touch off a race with deal makers at EMI, which has been in discussions to buy Warner Music Group in an arrangement that would be different from the one blocked by regulators. Some music executives are skeptical that regulators would approve more than one merger.

Sony officials could not be reached for comment Wednesday. A BMG representative declined to comment.

Howard Stringer, chairman and chief executive of Sony Corp. of America, said this week that Sony would like to retain operating control of any combined enterprise. Insiders said Sony might have a tough time working out a power-sharing structure with BMG’s privately held parent.

Sources said the talks have been overseen directly by Sony Music Chairman Andrew Lack and BMG Chairman Rolf Schmidt-Holtz. Both are former television executives and relative newcomers who arrived at their posts with no previous experience running record labels.

Sony Music is home to a diverse roster of acts, including Bruce Springsteen, Beyonce Knowles, John Mayer and Celine Dion. Among BMG’s stars are Justin Timberlake, Outkast and Alicia Keys.

Both Sony Music and BMG have been working to emerge from deep restructurings and a recent stream of red ink.

BMG posted an estimated $127-million operating loss for the first half of the year. Sony Music cut about 1,000 jobs this year and posted an estimated $50-million operating loss for the six-month period ended Sept. 30. Neither unit reports net income.

For Sony Music, there probably will be more eliminations: The parent company said this week that it expected its music and film businesses to lose a total of 1,700 jobs from March of this year to March 2006.