Merger of Sony, BMG Music Labels Wins Endorsement of European Commission

European regulators approved the merger of the music divisions of Sony Corp. and Bertelsmann on Monday -- a move expected to trigger massive restructuring that could include the loss of more than 2,000 jobs.

The international deal still needs U.S. regulators’ endorsement, which sources said could come as early as today. A spokesman for the Federal Trade Commission declined to comment.

The combined corporation, to be called Sony BMG, would be the world’s second-largest music company, behind Vivendi Universal’s Universal Music Group, with revenue of about $5 billion. The company would boast a diverse roster of artists including Usher, Barbra Streisand, OutKast, Bob Dylan, Britney Spears, Beyonce and Yo-Yo Ma -- accounting for 1 of every 3 albums sold in the U.S., according to Nielsen SoundScan data.

The consolidation would be certain to radically transform the landscape of the struggling music industry by shrinking the number of global competitors from five to four and giving them control of about 80% of the world music market. Independent labels tried to fight the merger, fearful that it would lead to collusion among the biggest players.

Sony and Bertelsmann won regulators’ approval by portraying the merger as their only way to compete in an industry beset by economic woes caused by piracy, volatile consumer demand and the pricing policies of mass merchants.

“We’re pleased that [the European Commission] has recognized that the creation of Sony BMG is an appropriate and necessary response to current market conditions,” said Andrew Lack, chairman of Sony Music Entertainment, who would run the merged company.

BMG Entertainment Chairman Rolf Schmidt-Holtz said he was pleased that the decision by European Union antitrust regulators in Brussels did not impose any conditions on the merger.

“We now look forward to completing the deal and concentrating on the successful integration of the two companies,” he said.

In the year ahead, Sony BMG would pursue a major restructuring, slashing nearly $400 million in costs and trimming more than 2,000 jobs -- or about 15% of its workforce, sources said. The corporation would achieve much of the savings by combining label operations in nearly 50 countries.

In the United States, the companies would cut costs by combining real estate, back-office operations, legal departments, accounting and other divisions -- including their classical music labels, sources said. It is unclear how many U.S. employees would be affected, but the integration is expected to begin within two weeks and continue throughout 2005.

The merged company would be run day to day by Sony’s Lack, who would assume the title of chief executive. Schmidt-Holtz would be non-executive chairman of Sony BMG’s board of directors. Bertelsmann’s Michael Smellie would be chief operating officer and Sony’s Kevin Kelleher would be chief financial officer.

The reorganization would be certain to cause management discord and morale problems as two cultures and operations combine.

The structure of Sony BMG’s label operations in the U.S. is still being hammered out. Sources said Sony’s Don Ienner and Bertelsmann’s Clive Davis would be likely to continue heading the company’s two key record sectors in New York, overseeing such labels as Columbia, Epic, RCA, Arista, J and Jive. Bertelsmann’s Joe Galante might take over the company’s combined Nashville division, sources said.

Before the deal’s approval by EU regulators, competitors had complained that further consolidation in the music business would lead to higher CD prices, less choice for music consumers and the stifling of online music stores. Regulators ultimately decided that they did not have enough evidence to prove that the merger would impede market growth and thus imposed no conditions in approving it.

Since antitrust regulators stopped Time Warner Inc.’s plan to merge its music operations with Britain’s EMI Group in 2000, court rulings in Europe have raised the burden of proof needed to reject such deals. To avoid tangling with regulators, Sony and Bertelsmann excluded the manufacturing, distribution and music publishing divisions of their companies from the merger.

There is speculation that the creation of Sony BMG would hasten further consolidation, adding pressure to the industry’s two smallest music corporations, publicly held EMI and private Warner Music Group, to rekindle their own merger talks.