EU Said to Back Label Deal

European regulators are poised to greenlight the proposed merger of the music divisions of Sony Corp. and Bertelsmann, brightening prospects for the creation of a juggernaut with a roster of artists as diverse as Bob Dylan, Outkast and Yo-Yo Ma, sources said.

The decision by European Union antitrust regulators, expected to be announced in Brussels as early as today, would transform the landscape of the global music industry by shrinking the number of major competitors to four from five.

The decision would mark a change of course for the regulators, who in formal comments on the proposed deal earlier this year had said the combination could harm competition. And it would be a major departure for EU antitrust chief Mario Monti, who frowned on two previous music industry merger plans in the last four years.

With annual revenue estimated at $5 billion or more, a combined Sony and BMG would seize the lead in U.S. record sales, accounting for about 1 of every 3 new albums in the nation, according to Nielsen SoundScan data.

Worldwide, the combination would account for more than 20% of sales of recorded music and would rank a close second behind Vivendi Universal’s Universal Music Group in market share.

Executives at competing entertainment companies had lined up to try to torpedo the deal, filing lengthy complaints with antitrust regulators. Rivals argued that Bertelsmann might unfairly leverage its TV and other media holdings to favor the combined company’s acts, and that Sony might do the same with its new online music service. Apple Computer Inc., which sells music online through its iTunes service, also criticized the deal.

European regulators recently appeared to endorse those objections in a formal statement delivered to the two companies. The regulators indicated that their most serious concern was that further consolidation in the music business would prompt the record conglomerates to march in lock step even more easily and collude to set prices.

In extensive filings and in hearings this week, Sony and BMG executives disagreed, saying consolidation in the retail sector had shifted the power to set prices to mass merchants.

EU officials then altered their stance, determining that their objections might not withstand a court challenge, sources said.

Since the European antitrust regulators nixed Time Warner Inc.’s plan to merge its music operations with Britain’s EMI Group in 2000, a series of court rulings in Europe has raised the burden of proof needed to reject such deals.

Sources said they didn’t expect the EU to impose significant conditions on the merger.

The Sony-BMG deal is still subject to approval in the United States, but Europe had been seen as the tougher hurdle and the chief bellwether of the transaction’s prospects.

If approved, the combination would be the first corporate tie-up in the music industry since Seagram Co.’s 1998 purchase of PolyGram for more than $10 billion, a deal that created industry leader Universal.

The creation of a Sony BMG would also probably pressure the two smaller music corporations, publicly held EMI Group and private Warner Music Group, to rekindle their own merger talks.

Representatives for the companies and the EU declined to comment. In a letter to employees Thursday, top BMG executives said their recent contacts with the regulators had been “open, productive and positive.”

Under the proposed deal, Sony Music Entertainment and Bertelsmann Music Group would be combined into a joint venture called Sony BMG. It would be run by a board of six directors: three from Sony and three from BMG, with Bertelsmann’s music chief, Rolf Schmidt-Holtz, serving as chairman. Sony Music Chairman Andrew Lack would become chief executive of the venture.

Lack and Schmidt-Holtz, both former television executives with no previous music experience, struck their partnership last year after Bertelsmann broke away from talks over a similar joint venture with Warner Music. A group of private investors led by Edgar Bronfman Jr. ended up acquiring Warner Music, beating out a rival bid from industry giant EMI.