(The Associated Press) (11/25/03)

By Alex Veiga

Edited By Michael Bennett

LOS ANGELES, CA - A consortium of investors led by former Universal Music chief Edgar Bronfman Jr. has announced it has struck a $2.6 billion deal to buy WARNER MUSIC GROUP from Time Warner Inc., edging out Britain's EMI Group PLC, which withdrew its bid at the last minute.

The deal, which also includes Time Warner's Warner/Chappell Music publishing business, creates one of the world's largest independent music companies and include some of the industry's biggest artists, such as Madonna, R.E.M, and the Red Hot Chili Peppers.

Bronfman, who oversaw a great expansion at Universal as its chief between 1995 and 2000, will lead the company.

Bronfman sold Universal before the impact of digital technology and the Internet helped spur a three-year slump in CD sales industry-wide.

Bronfman sold the company, a unit of his family's longtime liquor business, Seagram Co., to Vivendi in 2000. He tried to buy back Vivendi this year, but lost out to General Electric Co.'s NBC.

"Warner Music Group is one of the world's greatest recorded music and music publishing companies, and we have great faith in its potential for growth as an independent company and in the long-term opportunities of this industry," Bronfman said.

"We have brought together a highly sophisticated and well-financed group of investors to support the business."

Current Warner Music chairman Roger Ames was slated to take the No. 2 spot at the new company. More details on senior management and the composition of the board were to be announced later.

The deal was expected to close in January, according to the Bronfman investor group, which includes Boston-based private equity firms Thomas H. Lee Partners, Bain Capital and Providence Equity Partners Inc.

Hollywood billionaire Haim Saban, who initially was part of the investor group, pulled out of the consortium over the weekend after it became clear he would not be allowed to have a direct, controlling role with the company, according to an entertainment industry source who spoke on condition of anonymity.

Under terms of the deal, Time Warner would retain an option to buy back up to a 15 percent stake in the new company during the first three years after the sale closes, or up to a 19.9 percent stake at a favorable price if Warner Music were to merge with another music company, according to a source familiar with the deal.

The deal would also extend Time Warner's current music publishing agreements for four years and retain Time Warner's affiliation with Warner Music through its America Online digital music business.

The deal gives the giant media conglomerate a way to exit the embattled music business while raising billions in cash toward slashing its net debt.

"The cash is really the thing that makes the deal," said Michael Goodman (news), media and entertainment analyst at the Yankee Group.

"One of the biggest things Time Warner needs to do is pay down their debt. They're getting out of a business that is in decline for them."

The Bronfman-Time Warner deal was expected to slash Time Warner's net debt by about $2.6 billion, the company said.

"I'm very pleased that we are putting our music company in such capable hands," said Time Warner Chairman and CEO Dick Parsons.

"Despite my personal fondness for the music business as well as for all of our wonderful managers and music group employees, I believe that this transaction is clearly in the best interests of our company's shareholders."

Time Warner put its music business up for sale in late summer, conducting exclusive talks with BMG, a unit of the German media conglomerate Bertelsmann.

BMG ended up inking a tentative merger deal with Sony Corp. earlier this month.

EMI, the world's third-largest music company, approached Time Warner, eventually offering an estimated $1.5 billion cash and stock deal for Time Warner's recorded music division, but excluding the music publishing business.

EMI appeared to be the front-runner as late as Wednesday, when EMI officials publicly described the negotiations as having reached "an advanced stage."

But a day later, Time Warner's board focused in decidedly on Bronfman's consortium, giving them until the end of the weekend to finalize the deal, the source said.

Time Warner's board ultimately concluded the Bronfman deal would have a better chance of winning approval quicker from antitrust regulators than a merger with EMI, particularly in light of the merger agreement between Sony and BMG, the source said.

EMI, whose artists include Robbie Williams, Kylie Minogue and Radiohead, failed previous attempts to merge with BMG and Warner Music the past three years.

"They're low man on the totem pole," Goodman said. "In a declining business you don't want to be on the bottom, because you're the one who is gong to get impacted most significantly."

So far this year, Warner Music Group has 17.91 percent of overall market share, second only to Universal Music's 27.99 percent, according to data compiled by Nielsen SoundScan.

Sony Music Entertainment ranks third with 14.86 percent and BMG is fourth with 14.63 percent. EMI Group ranks fifth with 10.8 percent.

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