The chairman of Bertelsmann's board abruptly announced plans to resign Wednesday after objecting to the German media conglomerate's intent to merge its record label with Sony Music Entertainment, according to people familiar with the matter.
Bertelsmann said that Gerd Schulte-Hillen, head of its supervisory board and a 34-year Bertelsmann veteran, decided to quit at the end of the year after having a dispute with management over "the strategic direction of the company."
Schulte-Hillen had raised questions about the wisdom of the proposed deal with Sony Corp. and voted against it at a board meeting Wednesday, sources said. Bertelsmann Chief Executive Gunter Thielen engineered the board chairman's departure with the backing of Germany's Mohn family, the conglomerate's controlling shareholder, the sources said.
The response to Schulte-Hillen's opposition to a tie-up between BMG and Sony Music underscores Bertelsmann's commitment to a deal that would create the world's second-largest recording label and reduce both parent companies' exposure to the ailing record business.
The German and Japanese companies signed a letter of intent two weeks ago and on Wednesday, sources said, filed a preliminary merger application with European Union regulators in Brussels.
The announcement of the shakeup at Bertelsmann came as Time Warner Inc.'s board prepared for a meeting today to mull over competing bids for pieces of Warner Music, home to such artists as Kid Rock and Madonna.
British music giant EMI Group has offered about $1 billion for Warner Music's record label operations, while an investment team including former Seagram Co. Chief Executive Edgar Bronfman Jr. has bid about $2.5 billion for both the label and Warner Music's publishing arm.
EMI would give Time Warner a 20% to 25% stake in the new entity whereas the Bronfman team would offer the option of Time Warner holding as much as 20%.
London-based EMI, which carries some junk-rated debt, said Wednesday that its bid was fully financed and would stand a solid chance of winning regulatory approval. The music company made the declaration as it reported better-than-expected financial results for the first half of its fiscal year.
Net income was $14.3 million, or 2 cents a share, for the six months ended Sept. 30, down from $224 million, or 29 cents a share, from a year earlier. Revenue was $1.6 billion, essentially flat.
Some analysts were expecting a net loss because of the industry's downturn.
The six-month results included a one-time $23-million charge due to "unprecedented" returns of unsold albums from Japanese retailers and corporate reorganization costs. The year-ago earnings included a one-time $283-million gain from the sale of EMI's stake in music retailer HMV Group and other assets.
EMI's U.S. recorded-music division swung to an operating profit in the six months, the company said, thanks to the performance of its Capitol label, home to such acts as rapper Chingy and rock band Radiohead.
Since becoming EMI's chairman in 1999, Eric Nicoli has overseen two merger attempts -- including one with Time Warner in 2000 -- that sank under regulatory opposition in Europe.
For its part, Bertelsmann was in talks with Time Warner about a music alliance until those negotiations collapsed in September.
EMI shares rose 6% to about $3.04 in London stock exchange trading.