On the nation's pop charts, Time Warner Inc. turned in a command performance this year with hits from Linkin Park, Matchbox Twenty and Simple Plan. Behind the scenes, however, the entertainment and media giant is weighing a major retreat from the music business.
When Time Warner's board meets Thursday, it is expected to take up two competing offers for pieces of Warner Music Group -- and move closer toward a momentous decision that could end the company's three-decade run as a dominant force in the record business and accelerate the industry's move toward consolidation.
Since September, Time Warner has been in formal, nonexclusive talks to sell its recorded-music division to EMI Group. The British music giant has offered Warner about $1 billion in cash and a 20% to 25% stake in the combined company.
Warner also has been approached by former Seagram Co. Chief Executive Edgar Bronfman Jr. and kids' TV mogul Haim Saban, who have teamed with a number of private investors to offer an estimated $2.5 billion in cash for both Warner's recorded-music and music-publishing operations. That deal would take Warner out of the music industry completely.
With the clock ticking before Thursday's board meeting, potential bidders have been angling for better positions.
Sources said Tuesday that the Bronfman group recently had tried to sweeten its bid by offering Warner the chance to retain as much as 20% of the new entity.
Bronfman -- a songwriter who has written for such stars as Celine Dion -- also has held talks with Hollywood power broker Jeff Kwatinetz and his management company, the Firm, about a potential role in the new Warner Music structure, according to people familiar with the matter. Sources say Bronfman, Kwatinetz and private equity firm Thomas H. Lee Partners have been meeting quietly for as long as six months. Representatives for Bronfman and Kwatinetz declined to comment.
A handful of other investors -- among them New York financier Nelson Peltz and billionaire George Soros -- have expressed interest in the media giant's music division, sources say. But Time Warner executives have indicated that they remain focused on the offers from EMI and the Bronfman group.
"They want to run these two horses," said one person familiar with the situation.
On Thursday, Time Warner's board is expected to offer Chairman Richard D. Parsons and his management team its views on what to do with the music division. The board's input comes at a time when the music industry is grappling with a three-year-long sales slump.
In a study released Tuesday, research firm Informa Media projected that global retail sales of recorded music would fall 8.9% this year, to $28.2 billion, amid continued unauthorized trading of music files on the Internet and widespread copying of CDs.
Reacting to the unprecedented downturn, DreamWorks SKG recently agreed to sell its recorded-music business to industry leader Vivendi Universal for about $100 million. Sony Corp. and Bertelsmann are closing in on a deal to merge their music labels into a jointly owned venture to cut costs.
For Warner, any move to scale back would mark a dramatic strategic shift.
For much of the year, the company had been locked in exclusive talks with Bertelsmann about merging their recorded-music businesses, a deal that probably would have provided Time Warner with a 50% stake and a central management role in what would rank as the world's second-biggest record company. That deal collapsed over disputes about the value of each company's recordings and other assets.
As a result, Warner has turned to offers that would effectively mean bowing out as a significant power in the business after a 36-year span that nurtured the careers of such acts as Joni Mitchell, Madonna, Prince, Jimi Hendrix and Led Zeppelin.
A deal with EMI -- which releases music by such acts as the Beach Boys and Norah Jones -- would probably face intense scrutiny from antitrust regulators who have rejected music industry mergers twice since 2000. Experts say regulators are inclined to be especially tough now that Sony and Bertelsmann have signed a letter of intent to join their operations. The two deals would shrink the number of global competitors from five to three.
By contrast, a sale to the Bronfman team carries far less risk of being rejected by regulators because it wouldn't reduce the number of record labels. In addition to Saban and Thomas H. Lee, the Bronfman investor group includes Bain Capital and Providence Equity Partners Inc., sources said.
Bronfman has made big deals in the entertainment world before -- with mixed results.
He turned Seagram, his family's worldwide liquor empire, into a major Hollywood force by buying the former MCA Inc. and built the world's biggest record company, Universal Music Group, with the acquisition of Dutch giant PolyGram. But he lost a fortune after he sold out to Vivendi.
Bronfman's jockeying for Warner may renew old hostilities.
Following the PolyGram acquisition, Bronfman refused to appoint then-PolyGram chief Alain Levy to head Universal's global operation. Levy, who was credited with transforming PolyGram from a quiet classical music label to an international powerhouse, quit -- and now is a top executive at rival bidder EMI.
That only two main contenders are in the race for Warner Music underscores the industry's straits.
"If the future were less uncertain," said Harold Vogel, head of Vogel Capital Management and a veteran entertainment industry analyst, "there'd be a line around the block to buy it."