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SBMG CLEARANCE TO CREATE SECOND MUSIC MEGAGROUP

Work on Merging Massive Operations to Begin; European Commission Says Will Scrutinize Further Consolidation
The merger of the recorded-music divisions of Sony Music and Bertelsmann’s BMG, having won approval from the European Commission yesterday, is also expected to be green-lighted by U.S. regulators as early as today, according to reports.

Once the U.S. Federal Trade Commission clears the deal, the powers that be, or will be, at Sony BMG will begin the arduous task of combining operations and finding up to $350 million in annual cost savings. The combined SBMG will be the second-largest music company worldwide (behind Universal Music Group) and will be the largest in the U.S. with marketshare of about 33%—effectively leaving the business with two "major" groups (WMG and EMI) and two "megas." SBMG's annual revenue has been estimated at about $5 billion.

It has been widely reported that SBMG has briefed executives that it will need to cut between 2,000 and 3,000 jobs, or up to 25% of its combined workforce, to achieve the necessary reduction in costs. According to the L.A. Times, much of the cost savings/headcount reductions will be achieved by consolidating label operations in up to 50 international territories.

In the U.S., SBMG will combine real estate holdings, back-office operations, legal and accounting departments and other divisions the Sony and BMG have in common, though core label operations are expected to continue largely as they are—both companies having recently streamlined. The merging will likely begin within two weeks and continue through 2005, the Times says.

SBMG will be run by Sony’s Andrew Lack, who will be CEO. BMG topper Rolf Schmidt-Holtz will be non-executive Chairman. BMG’s Michael Smellie will be COO, while Sony’s Kevin Kelleher will serve as CFO. Sony’s Don Ienner and BMG’s Clive Davis are expected to retain control of their respective label domains, though the Times says RCA Label Group head Joe Galante may be given control of a combined Nashville operation. 

Meanwhile, the European Commission says it will keep an eye on any further consolidation moves in the music business.

While the EC “had to conclude ... that the evidence found” during its investigation of SBMG “was not sufficient to demonstrate in a successful way that coordinated pricing behavior existed in the past,” the proposed merger would “not yet create a collectively held dominant position” in the industry, the EC said in a statement, according to AP.

“The Commission will keep a close watch on the music sector as it becomes even more concentrated and would very carefully scrutinize any further major concentration in the industry,” the EC further stated.

A spokesman for European indie-label group Impala called the approval of SBMG “very bad news not only for independents, but also for retailers and artists.” A coalition groups opposed to the merger, including Impala strenuously objected to the EC’s decision, even threatening legal action to try to get it overturned.
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