Germany’s Bertelsmann Planning to Acquire CDNow

FORT WASHINGTON, Pa. —  German media giant Bertelsmann said Thursday it will buy U.S. Internet music store CDNow Inc. for about $99 million in cash.

Bertelsmann, whose holdings include No. 2 U.S. record company BMG Entertainment, will also assume $42 million of debt in the deal. This includes funding that Bertelsmann is extending to CDNow to pay off debts and to keep the business going until the sale closes later this year.

Bertelsmann is under pressure to expand its Internet businesses as America Online Inc. plans to acquire Time Warner Inc., a deal that’s expected to cut distribution costs by moving Time Warner’s products online to be downloaded.

“The challenge for Bertelsmann is to improve margins and change it to an integrated music destination where consumers can buy CDs, get free downloads of music and video clips, read stories and interviews,” said Rebecca Ulph, an analyst at Forrester Research Inc.

CDNow, with 4 million customers in eight countries, will help BMG sell its own music over the Internet, she said.

CDNow, which has lost $212 million since it was started in 1994, has been seeking new capital. In March, CDNow’s auditor expressed “substantial doubt” about the company’s ability to stay in business.

The purchase values CDNow at $3 a share. CDNow rose 5 cents to close at $2.92 on Nasdaq, less than a fifth of its initial offering price of $16 in February 1998. The shares peaked that April at $35.50.