Napster Sale to Bertelsmann Blocked by U.S. Court

By | September 4, 2002 at 12:00 AM

A U.S. court hammered the final nail in the coffin of maverick music service Napster on Tuesday when it blocked a bid by German media group Bertelsmann AG to buy the one-time cult and now defunct Web site.

Killing off a deal to revive the bankrupt service that millions of fans used to swap music over the Internet, a U.S. bankruptcy court rejected Napster’s sale to Bertelsmann after record labels and songwriters opposed the deal, saying the offer price was not fair.

Faced with no financing, no revenues and no other buyers, Napster said it would most likely be forced into Chapter 7 liquidation, ceasing operations altogether and terminating its remaining employees.

Napster, which once commanded a devoted following of some 60 million fans downloading free song files from its central servers, was forced to shut down last year after major record labels convinced a federal judge it violated copyright laws.

But Bertelsmann’s former CEO Thomas Middelhoff shocked the industry by agreeing to buy Napster out of bankruptcy, with the aim of relaunching it as a legitimate subscription service.

Bertelsmann offered $9 million for Napster’s remains on top of some $83 million already sunk into the Web site, but record labels and songwriters argued it was too little. The German group said it would no longer pursue the acquisition.

“As a result of the record companies’ and music publishers’ opposition, Napster’s creditors will be denied substantial repayment and the company will likely be forced into Chapter 7 liquidation,” Napster CEO Konrad Hilbers said in a statement.


Prospects for the Internet’s best-known music service had already grown bleak after Middelhoff’s ouster at the end of July. Napster, founded by college student Shawn Fanning in 1999, had been Middelhoff’s pet project and it had few other supporters within the German media empire.

Once seen as a major threat to the music industry, Napster’s star has also been on the wane among online music fans, many of whom have turned to Gnutella and other peer-to-peer music exchange programs that connect fans directly to each other’s computers rather than routing files through centralized servers.

Even if the U.S. bankruptcy court had accepted Bertelsmann’s bid, sources close to the company said the German group was unlikely to provide further funding and the operation may have either been folded into another division or closed.

However, Bertelsmann may still try to get something out of the liquidation, some sources familiar with the situation said. Under Chapter 7 liquidation, a trustee is appointed by the court to liquidate the assets.

A group of recording companies and music publishers had argued that Bertelsmann had not offered enough money and that Napster had failed to market its assets properly.

Napster denied the sale price was too low or that it had colluded with Bertelsmann to ward off outside bidders. But a bankruptcy judge decided Napster could not prove the deal was made in good faith and at arm’s length – two key requirements for a sale under the U.S. bankruptcy code.

Under Middelhoff’s leadership Bertelsmann invested 103 million euros in Napster in the form of a secured loan, including some $83 million related to technology licensing.


Since Middelhoff’s exit, Bertelsmann’s new chief executive Gunter Thielen has been reviewing the German group’s Internet operations in a clamp-down on loss-making units.

Thielen also finally shut the door on the group’s main e-commerce business, BOL, on Tuesday. Bertelsmann said it was looking to exit its loss-making BOL businesses in Sweden, Switzerland, Germany and the Netherlands in an overhaul of its Internet operations.

Thielen said Bertelsmann would focus instead on turning around its core book clubs and music business – the two divisions which posted losses in first half results on Tuesday.

Bertelsmann posted a return to operating profit of 157 million euros compared to a previous loss of 884 million a year earlier, as lower online and restructuring costs countered a tumble in advertising revenues. However, the advertising slump pushed revenues lower to 8.83 billion euros from 9.29 billion.

Bertelsmann also said a windfall from the sale of shares in AOL Europe offset a one billion euro provision for a possible write-down on Zomba, the music company it is taking over.

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