Consolidation in the online music retailing market continued apace yesterday with the acquisition of CDNow Inc by Columbia House, which is a club-based direct marketer of music and videos owned jointly by Sony Corp and Time Warner Inc. The original players are feeling the squeeze as retailers such as Amazon.com Inc and now the record companies themselves expand their web offerings to embrace CDs, as they have almost every other commodity item.
The acquisition, the terms of which were not disclosed, looked a bit hastily put-together and the new company doesn’t yet have a name or a chief executive. Acquisition was increasingly being seen as the only way out in the long term for CDNow, which has been bleeding red ink and recently engaged in an expensive, if fairly unsuccessful marketing campaign.
And sure enough, on the day of the acquisition came a profit warning from the company, saying it would miss the $0.83 per share consensus estimate for its second quarter losses and would record lower revenues than expected, at around $34.5m to $35m. It did not say what it expects its quarterly losses to be.
The company notes that because of the effort of integrating the customer base of its previous major merger, the acquisition of its old rival N2K Inc, which operated the MusicBoulevard.com site, its marketing efforts have been concentrated on what are in effect existing customers, rather than going after new ones.
Time Warner views the acquisition as central to its new internet strategy, which will involve various hub sites following the shutdown of its old-school Pathfinder site. Columbia House has about 16 million members who buy CDs videos, DVDs and CD-ROMs and drove 1998 sales of $1.4bn and it expects to do about $100m from its web site this year. CDNow saw net losses of $43.8M on revenues of $56.4m.
One possible hiccup in what otherwise looks like the only viable way out for CDNow, is that the offering values the company at less than its market capitalization at the close on Monday. The deal, which will see each CDNow share swapped for one of the new company, appears to value CDNow at between $17 and $20 per share. On Monday it closed at $22.25, but it should be noted that that price represented a run-up from around $14 in early June. CDNow closed yesterday down $1.9375, or 8.7% at $20.3125. Sony and Time-Warner, which will each own 37% of the new company, will merge its operations with those of Columbia House. Existing CDNow stockholders will hold the remaining 26%.
