AOLTW, BERTIE MERGER TALKS
HEAT UP AGAIN

AOL Time Warner and Bertelsmann are in active talks to merge their music divisions into an entity that would rival Universal Music Group if such a merger could actually be banged out.

However, the Wall Street Journal reports that people familiar with the matter said a deal is highly uncertain. Still, the discussions are the latest steps in a plan by thr music majors to try and combat its host of problems, including falling album sales, piracy, dwindling shelf space in retail stores and radio consolidation.

As has been suggested previously, the two media giants are discussing combining Warner Music Group and BMG, in a transaction that would have each company own 50% of the new entity. The Journal said both companies' music-publishing operations likely would be excluded from the merged venture.

Last year, WMG had revenue of $4.2 billion, while BMG had revenue of €2.7 billion ($3.1 billion). (Those figures include music-publishing revenue and, for Warner, revenue from CD and DVD manufacturing operations.)

It isn't the first time either company has had merger talks with another music company, as both AOL and Bertelsmann contemplated absorbing EMI on different occasions in the past few years. But these latest talks are further advanced than other discussions, according to one person familiar with the situation. The discussions have heated up over the past month, this person said, including talks at the highest levels of AOL and Bertelsmann, the Wall Street Journal reports.

Even so, people familiar with the situation noted that a deal is far off as the companies haven't worked out some difficult issues, including the valuation of each unit. The paper says WMG has a much more valuable catalog of older music, which means putting an equal value on the two companies' assets likely would be difficult.

Also to be agreed is who would manage the venture, sure to be a contentious subject. The Wall Street Journal notes that Bertelsmann may be unwilling to yield management oversight, although WMG Chairman Roger Ames would be a logical choice to run the venture as he has much deeper experience in music than BMG Chairman Rolf Schmidt-Holtz.

An AOL spokesman said the company had no comment. Representatives for both Bertelsmann and BMG issued the same statement, that "many interested parties in the industry are talking to each other" but it was Bertelsmann's policy not to comment "on market speculation."