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Bertelsmann and EMI Group on Tuesday abandoned plans to merge their recording businesses, after determining that regulatory hurdles in Washington, D.C., and in Brussels, Belgium, were simply too high. “After exhaustive analysis and discussion, we have been unable to find a deal with Bertelsmann which works for both shareholders and regulators,” EMI Chairman Eric Nicoli said. It’s the second time in less than a year that EMI has been left standing at the altar after European competition authorities raised objections to a merger. In October, EMI and AOL Time Warner abandoned their $17.3 billion merger attempt after months of failed negotiations in Brussels. EMI spent $64.4 million on the scuttled AOL Time Warner deal, in legal and investment-banking fees. Much of that went to high-priced Brussels lobbyists, who were working to get the merger approved by European Competition Commissioner Mario Monti. This time, Nicoli said costs during EMI’s five months of negotiations with Bertelsmann were “not material.” Talks between Bertelsmann and EMI were called off after European competition authorities indicated that they would reject any deal that reduced the number of major record labels from five to four. Under that condition, EMI and Bertelsmann would have had to sell off sufficient assets to create another fifth major. European regulators were reported to be demanding that BMG rid itself of its RCA label or that EMI sell off Virgin Records. This was unpalatable to some shareholders and to EMI’s head of recorded music, Ken Berry. Berry had been instrumental in bringing Virgin — label of the Rolling Stones and the Spice Girls — into the EMI fold, as the label bought it from Richard Branson in 1992. EMI is the third-largest record label in the world and owns the world’s largest music-publishing business. But it is the only major label that is not owned by a larger media company that has access to digital distribution mechanisms. The reasons that this second proposed merger failed would seem to rule out EMI joining another major. Other media companies without music assets, such as Disney and Viacom, may be potential partners. In addition to hurting EMI, the abandoned merger also represents a serious blow to Bertelsmann. Chairman and CEO Thomas Middelhoff pledged to make the world’s largest record label by the end of 2000. Bertelsmann has also been stung by the weakening of Napster, in which it invested $60 million in November. Napster use has dropped 20 percent since it began filtering out copyrighted songs in March. The good news for both is that Bertelsmann and EMI inked a deal with RealNetworks in April to construct a music-sharing service that compensates rights-holders. Bertelsmann also noted that its online and mail-order retailers — BOL.com, CDNow.com and BMG Music Service — make it the largest retailer of music in the world. “BMG’s status as a magnet for entrepreneurial and creative talent and our cutting-edge distribution concepts put us in a good position in the music business,” Middelhoff said. News of the failed merger and of a 12 percent increase in sales sent EMI Group shares up 13 pence (19 cents) on the London Stock Exchange by midday. Related Articles from The Industry Standard: BT to Retreat From Japan BT to Sell JT, Airtel Stakes to Vodafone Kodak to Snap Up Ofoto Copyright � 2001 The Industry Standard

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