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Bertelsmann, Sony to Merge Music Cos.

Bertelsmann AG and Sony Corp. announced a preliminary plan to merge their music businesses Thursday, setting the stage for a music company that would vie for world primacy with Universal Music Group.

A merger of Sony Music Entertainment and Bertelsmann’s BMG, if it comes to pass, would bring together the world’s No. 2 and No. 5 music companies as the industry struggles with losses blamed on music piracy.

The new company, to be called Sony BMG, would be equally owned by Sony and Bertelsmann and run by Andrew Lack, chairman and chief executive of Sony Music Entertainment. Rolf Schmidt-Holtz, the chairman and chief executive of BMG, would serve as chairman of the board.

Bertelsmann didn’t say whether the two companies had agreed on financial terms in their letter of intent or what issues remained to be worked out before a final agreement could be struck. Patrick Reilly, a spokesman for BMG, said the two companies had agreed to hold exclusive talks, but he did not say for how long.

In a letter to BMG employees obtained by The Associated Press, Schmidt-Holtz said the venture should be completed in the “coming weeks and months.”

A spokesman for Sony said Lack was traveling and couldn’t be reached.

The deal would put some of music’s biggest stars under a common corporate roof. Sony Music Entertainment’s labels include Columbia, Epic, and Sony Classical, and it is home to pop artists including Bruce Springsteen, Beyonce Knowles and Celine Dion.

Among the stars on BMG’s various labels are Dido, the Dave Matthews Band, Christina Aguilera, Alicia Keys, Avril Lavigne and the late Elvis Presley.

Other major record companies also are seeking to merge as a way to shore up their strength in the face of declining album sales and rampant file-swapping on the Internet.

EMI Group PLC of Britain is in talks about the possibility of buying Warner Music Group from Time Warner Inc., three years after European regulatory opposition ended their discussions about a possible joint venture.

Sony BMG would have a combined global market share of 25.2 percent, according to the market measurement firm IFPI, just behind the 25.9 percent share held by industry leader Universal Music Group, which is part of the French conglomerate Vivendi Universal.

In the U.S. music market, however, the combined company would edge out Universal as the largest, based on the most recent figures available from Nielsen SoundScan. Sony and BMG have a combined 28.3 share of U.S. sales, versus 27.8 percent for Universal, according to SoundScan.

If the deal goes through – it still faces approval by U.S. and European regulators – it would combine Sony and BMG’s recorded music business but would exclude music publishing, physical distribution and manufacturing.

Antitrust lawyers said changes in the market could mean Sony and Bertelsmann would have an easier ride than Warner Music and EMI, which European Union regulators feared would lead to an oligopoly of four firms controlling 80 percent of the European market.

“I’d imagine that it’s a totally different market today than it was when the (European) Commission last reviewed it, particularly the advance in the ability to download music over the Internet,” said Mark Powell of White and Case in Brussels.

Given declining sales and profits, Sony and Bertelsmann may try to argue they need to be bigger to survive, Powell said.

The board of the new company would be split, with an equal number of directors from each partner, and senior executives from both groups would join the venture.

Sony shares fell 78 cents to $35.99 in early afternoon trading on the New York Stock Exchange. Bertelsmann is privately held.

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