BMG, Warner Music Discussions Falter

Talks to merge the recorded-music businesses of AOL Time Warner Inc. and Bertelsmann appeared on the verge of collapse Thursday with AOL opening the door to other suitors.

The companies have been trying to hammer out a pact to fuse the record labels of AOL’s Warner Music Group and Bertelsmann’s BMG into a joint venture that would rank as the world’s second-biggest music company behind Universal Music Group.

But the talks have dragged on for four months, and AOL managers told members of the company board Thursday that other options are now open. Among them: the sale of a majority stake in Warner Music to British rival EMI Group, sources said. EMI executives this week told AOL that they remain interested in buying a a piece of the music operation, sources said.

A breakdown in the AOL-Bertelsmann talks would come as a reprieve to EMI, which faced the prospect of being the odd man out in the latest wave of industry consolidation. AOL and Bertelsmann now could find themselves competing for the chance to join with EMI. Representatives of the companies declined to comment, but sources close to the negotiations said Warner Music and BMG insiders still prefer a deal with each other.

European regulators frowned on previous efforts by both Warner Music and BMG to merge with EMI. Moreover, label executives say EMI has a weak track record in the U.S., raising questions about the wisdom of a joint venture.

AOL and Bertelsmann stalled over the valuations of the music units, with AOL insisting that Warner Music, with its archive of classic recordings, is worth more than BMG.

The two sides have been haggling over how much cash Bertelsmann might have to pay in order to balance out the venture. Sources close to Bertelsmann say the German media giant isn’t likely to drop the talks over a small financial dispute. But Bertelsmann and AOL also don’t see eye to eye on the division of duties of the executives who would be running the combined venture, these sources said.

They added that under the management blueprint discussed, BMG Chairman Rolf Schmidt-Holtz would serve as head of the merged company and report to Bertelsmann’s board. And Warner Music Chairman Roger Ames would serve as president and chief executive, with responsibility for the day-to-day operation of the company’s labels.

Bertelsmann has long been reluctant to surrender too much control of its music business.

A decision by AOL’s top executives to switch strategies and pursue a sale to EMI would undercut Ames, who sources say doesn’t relish reporting to EMI recorded-music chief Alain Levy, his former boss at music giant PolyGram.

The haggling over the final terms of the deal reflects the complexities of the two conglomerates’ relationship -- one that has occasionally engendered bitterness and distrust. AOL executives were irritated this year when Bertelsmann pulled back from a potential deal to buy the New York-based giant’s book unit.

And some insiders remain bitter about Bertelsmann’s exercise of an option to sell its 49% stake in AOL Europe to AOL Time Warner, a deal that paid the German conglomerate about $7 billion in cash while AOL’s own shares plunged.