Struggling CDNow Finally Finds a Buyer

FRAMINGHAM (07/21/2000) - After its deal with Columbia House was scrapped in March, financially strapped online music retailer CDNow Inc. Thursday agreed to be acquired by German media conglomerate Bertelsmann AG.

Bertelsmann's e-Commerce Group (BECG) agreed to buy Fort Washington, Pa.-based CDNow for about US$117 million, or $3 per share, and make it a wholly owned subsidiary. BECG spokesman Andy Brimmer said the U.S. online music retailer will become the home station for BECG's future digital music downloading and streaming media across online, mobile and broadband platforms.

BECG will also advance CDNow $42 million to pay off loans and fund the Web site's operation until the merger's completion, which is expected before the end of the quarter.

Brimmer said CDNow's management and workforce will remain intact.

Last July, CDnow said it would merge with Columbia House, but the companies scuttled the merger last March.

After being spurned by Columbia House, the online music site posted a $37.8 million first-quarter loss. Last month, CDNow warned stockholders it might be sold for less than its then stock price of $4.28 per share.

Analysts were split on the wisdom of the merger.

Gartner Group Inc. analyst Rob Labatt called the BECG buy out "a great marriage" and said it will give Bertelsmann the U.S. presence it lacks as it competes against U.S. media giants like AOL/TimeWarner. He added that CDNow was the largest available publicly traded online retailer.

"That's a pretty good deal to get them for $117 million," LaBatt said. "It gives [BECG] one giant leap forward instead of incremental steps forward."

But David Cooperstein, a senior analyst at Forrester Research Inc. in Cambridge, Mass., disagreed, voicing concern over CDNow's recent financial woes.

"I think Bertelsmann's adopting a problem child," he said. "CDNow's business sort of flattened out after Amazon entered the music business."

Both analysts agreed BECG will need to pump marketing dollars into CDNow and link the online retailer with other Bertelsmann efforts, like the BMG Music Service and GetMusic.

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