Bertelsmann Completes Purchase of Zomba Music

Bertelsmann completed its $2.7-billion pact to buy Zomba Music Group on Tuesday, hailing the acquisition as a sign of its growing strength in the global music business.

Industry insiders see it as something else: absurd.

Bertelsmann, critics say, drastically overpaid for Zomba and will be hard pressed to generate a return on its investment.

The Zomba deal could go down as the most expensive label acquisition ever -- dwarfing the price tags of such legendary labels as Interscope, Geffen, Island, A&M; and Motown.

“Given the declining state of the music industry, it’s nearly impossible to square away any multibillion-dollar transaction for just one label. It makes no sense,� said Michael B. Nathanson, an analyst with Sanford C. Bernstein & Co.

“Particularly when you could buy EMI, a corporation with a profitable publishing arm and a 100-year-old catalog that includes the Beatles and Frank Sinatra,� Nathanson said.

Indeed, EMI Group, a British music powerhouse that is triple the size of Zomba, has a market value of $1.9 billion.

The Zomba deal, originally announced in June, closes the book on a series of costly moves by the executives who formerly ran Bertelsmann’s music division.

Decisions by former BMG Chairman Michael Dornemann and his chief executive, Strauss Zelnick, prompted years of executive turmoil and cost the German conglomerate billions of dollars, sources said. Both executives were forced out of their jobs.

The terms of a 1991 agreement struck by Dornemann allowed Zomba founder and Chief Executive Clive Calder to exercise an option to sell Bertelsmann the remaining 80% stake of his company if Zomba hit specific sales targets. At the time, Dornemann never dreamed that Zomba would hit the targets, BMG insiders said.

But Calder, cashing in on the global success of such discoveries as Britney Spears, the Backstreet Boys and ‘N Sync, decided to force Bertelsmann’s hand in June.

Bertelsmann -- already struggling with a $4-billion debt load -- has said it plans to help underwrite the Zomba acquisition by raising up to $1 billion in a bond offering.

Bertelsmann takes charge of Zomba at a time when the teen pop craze is fading. Zomba also faces several legal challenges: R&B; crooner R. Kelly, one of its top stars, was arrested in June on child pornography charges, and the Backstreet Boys sued the label on Tuesday for breach of contract.

Calder resigned Tuesday immediately after the $2.7-billion transaction was announced. Calder’s right-hand man, Barry Weiss, will run the Zomba label under Bertlesmann.