(Reuters) (11/21/03)

By Jeffrey Goldfarb and Derek Caney

Edited By Michael Bennett

NEW YORK, NY - Seeking a bigger cash payment and a potentially smoother exit from the music business, Time Warner Inc. opted on Thursday to pursue a sale of its music unit to an investor group rather than a deal with a rival, sources familiar with the matter said.

Time Warner, the world's biggest media company, aims to hammer out a final deal to sell Warner Music, home to such artists as Madonna and Led Zeppelin, as early as Sunday with a group led by media moguls Edgar Bronfman Jr. and Haim Saban, these people said.

The decision, after a board meeting on Thursday, is a radical departure for the music industry. The five big record labels have been talking about merging with one another for years, but U.S. and European regulators have consistently frowned on any further consolidation.

Over the last several weeks, the No. 3 record company EMI Group Plc., whose roster includes The Beatles and Norah Jones, was said by sources to have the inside track, helped by its management experience and its ability to wring cost savings out of a combination.

But with Sony Corp. and Bertelsmann already attempting to work a deal to combine their music businesses, Time Warner now favors a deal with the Bronfman-Saban group that likely would face little if any antitrust scrutiny.

Time Warner could opt to keep a 20 percent stake in Warner Music under the terms offered by the group of investors, sources say.

KAZAA FORCES INDUSTRY'S HAND

Time Warner's board of directors decided on the exclusive negotiations after reviewing an estimated $2.55 billion bid for the entire music business from the Bronfman-Saban group and a separate bid of about $1 billion from EMI for a majority stake in only the recording unit, sources said.

EMI said on Thursday it had been advised that Time Warner was considering an alternative proposal, which sources have confirmed is the Bronfman-Saban group.

The sale of the Time Warner music unit comes as the industry battles weaker retail sales, free file-sharing from services like Kazaa and competition from other inexpensive entertainment like DVDs and video games.

Time Warner also has been under pressure by shareholders to pare down its $24 billion of debt. It has sold its stake in cable network Comedy Central, and agreed to sell two of its sports teams as part of that effort.

Officials for Warner Music, Time Warner, Bronfman and Saban declined to comment.

Both Saban and Bronfman have songwriting and music industry experience, but Bronfman would head Warner Music, said one person familiar with the proposal.

Bronfman was the former head of Seagram, which once owned No. 1 label Universal Music. He is also credited with writing such songs as "Whisper In The Dark" for Dionne Warwick and "To Love You More" by Celine Dion.

Saban, the former children's programming magnate, began his career as a musician and concert promoter in Israel and France.

He later composed music for TV shows, including the cartoon "Inspector Gadget," and started a recording studio and music production company in Los Angeles.

STAKE FOR TIME WARNER

In addition to the option to keep a 20 percent stake in the music unit, Time Warner also has been offered the potential for an additional 19.9 percent stake if the investor group later merges the business with another record company, one source said.

The group's offer is being financed by Saban and Bronfman, as well as by private equity firms Providence Equity Partners, Thomas H. Lee and Bain Capital, sources said.

Other backers could still join the group, too, one of the sources added.v The Bronfman-Saban deal likely would have an easier path to regulatory approval than the EMI offer and the group is also offering more upfront cash for the combined recorded and publishing units.

Analysts say Time Warner could get more by selling the recorded and publishing units separately.

EMI is bidding about $1 billion in cash for Warner's recorded music unit and also is offering Time Warner a 20 percent to 25 percent stake in the combined company, sources have said.

One person familiar with the matter said EMI is confident about its bid and has no plans to raise it.

Another person suggested that the delay in the decision could be part of a poker game by Time Warner to squeeze more money from both bidders.

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