Bertelsmann, EMI Merger Expected to Be Scratched

EMI Group, home to such acts as the Beatles and Nikka Costa, is about to be left at the altar again as its latest merger proposal--this time with Bertelsmann--is set to collapse under the weight of antitrust concerns in Europe.

The deal’s demise is expected to be announced today following a final desperate pitch to the European Commission’s competition policy chief Mario Monti by executives from the two companies, according to people familiar with the situation.

The announcement would mark the third time that EMI has been jilted in its efforts to forge an alliance with a competitor, and would probably send its stock tumbling.

EMI, which ranks last among the five major entertainment conglomerates in U.S. sales of current albums, has been wooed and then rejected in recent years by both Seagram Co. and Time Warner.

The British music giant has been the subject of takeover speculation since the early 1990s, with a parade of potential buyers, including Walt Disney Co. and Viacom Inc., kicking at its tires.

Combining Bertelsmann’s music division with EMI would create the world’s second-largest music conglomerate with sales of about $10 billion.

EMI was receptive to Bertelsmann’s advances in November, but demanded an assurance that the deal would not ultimately be rejected by Monti, who had vetoed Time Warner’s offer following a lengthy delay that paralyzed EMI operations and cost it millions of dollars in legal fees.

Monti, who has been extremely vocal about his belief that further consolidation of the music business would damage consumers, currently is investigating the Big Five record companies for alleged CD price-fixing.

Over the last five months, EMI Group Chairman Eric Nicoli and Bertelsmann Chairman Thomas Middelhoff have grappled with a number of scenarios to appease Monti, but they apparently failed to come up with anything that could satisfy his antitrust concerns, according to the sources.

The discussions have included a series of proposals under which the combined company would sell off large chunks of its assets to a variety of competitors, including Disney and Zomba Music Group.

Sources say Nicoli has been determined to consummate the deal, but has met with resistance from his own EMI music chiefs, Ken Berry and Martin Bandier, who have balked at subjecting the company to another lengthy regulatory review.

In addition, Berry has been adamant in his opposition to selling off EMI’s Virgin Records division--a crucial component, sources say, of getting the deal passed by regulators.

The unraveling of the merger raises significant questions about the future of both EMI and Bertelsmann.

While EMI maintains a strong international business, the company has long faltered in the U.S., the dominant market for CD sales.

The U.S. arms of EMI’s Virgin and Capitol Records have been plagued by management strife since the early 1990s that has damaged their market share as well as their reputations in the creative community.

Bertelsmann’s music division also has been beset by corporate infighting that led last year to the ouster of several top executives and contributed to millions of dollars in losses. The company’s Arista and RCA divisions are struggling as is its international sector.

Bertelsmann’s third-place ranking in U.S. music market hinges primarily on an unprofitable distribution deal with Zomba Music Group that runs out in June.

The German conglomerate’s plans to join forces with the controversial Napster file-sharing service also have met with great resistance among competitors.