AOL Has a New Suitor for Its Warner Music Division -- EMI

AOL Time Warner Inc. may enter formal talks within days to sell its recorded-music division to British rival EMI Group, but the New York-based media giant hasn’t abandoned its five-month effort to enter a partnership with Bertelsmann, sources said.

The sudden emergence of EMI as a bidder follows the expiration of AOL’s exclusive negotiating agreement with German conglomerate Bertelsmann last week. EMI made an unsuccessful run at AOL’s Warner Music division earlier this year, and now it is trying to sweeten its offer, according to several people close to the talks who spoke on condition of anonymity.

Bertelsmann has also been in contact with EMI about a merger, but so far its talks don’t appear to be advancing, sources said.

Under EMI’s plan, the publicly traded British company would provide AOL with a 25% stake in a combined Warner Music-EMI venture and a cash payment of about $700 million, with incentives that could raise the offer to $1 billion, sources said.

The deal would not include AOL’s Warner-Chappell music publishing division, but AOL would likely auction it separately and expect to fetch about $1 billion. One person familiar with the talks said an earlier EMI bid included little or no cash, but that could not be confirmed.

But AOL could still opt to close a deal with Bertelsmann, whose board may weigh in on the bidding at its regular meeting today.

AOL and Bertelsmann had been hammering out the details of a plan to merge their recorded-music operations into a single, jointly owned venture. But the talks bogged down in disputes about the valuations of the two music units and the management structure of the merged label. In recent days, at least one discussion was scheduled between senior AOL and Bertelsmann executives to decide whether to proceed any further, sources said.

Either way, the latest deal-making frenzy could force AOL to reexamine its view of the music industry, which is suffering from rampant piracy and a bloated cost structure.

When the former America Online agreed to merge with Time Warner in 2000, some executives believed music would become a potent marketing tool for an online service that was scrambling to sign up millions of Internet subscribers. But amid widespread illegal file sharing and America Online’s own woes, that strategy hadn’t worked as planned.

For parent company AOL Time Warner, the EMI deal offers a chance to cut its exposure to the industry’s downturn while permitting AOL to have a stake in a rich music catalog with a stronger presence, particularly in key territories outside the United States.

Still, prospects for regulatory approval remain uncertain -- European Commission officials rejected an attempt by Time Warner and EMI to form a 50-50 partnership three years ago.

Representatives for the companies declined to comment.