Bertelsmann and AOL music divisions in courtship dance

Bertelsmann and AOL Time Warner are reportedly on the merger dance floor making moves towards a possible combination of their recorded music divisions that would create a new powerhouse in the industry.

Bertelsmann and AOL Time Warner are reportedly on the merger dance floor making moves towards a possible combination of their recorded music divisions that would create a new powerhouse in the industry.

If they do a deal, their combined roster would include artists such as Madonna, Christina Aguilera, Led Zeppelin and Elvis Presley.

While the courtship is thought to be still in a preliminary stage, analysts welcomed a possible agreement as a workable solution for two companies struggling with the problems plaguing the sector, including rampant digital piracy, flagging sales and diminishing retail space.

The negotiations, reported yesterday by the Wall Street Journal, envisage a merged company with AOL Time Warner and Bertelsmann each holding a 50 per cent share. However, stumbling blocks may include concern that Warner Music has a richer collection of artists than Bertelsmann's BMG.

A deal could also face regulatory hurdles. An attempt in 2000 to fuse the music businesses of AOL Time Warner and Britain's EMI was scotched by competition regulators in the European Union who resisted a move that would have reduced the number of major music companies from five to just four.

Should these talks succeed, the resulting company would rival Vivendi Universal, currently the largest of the recorded music companies. It would also cast a long shadow over Britain's EMI which has failed to find a partner. Lehman Brothers said: "A merger involving EMI would likely be a positive for the stock, but the merging of two competitors would leave EMI stranded."

In an attempt to forestall regulatory objections, the deal would exclude the music publishing divisions of both companies. AOL Time Warner, which has committed itself to lowering its huge debt, has long been considering selling off Warner Chappell, its publishing division, a move that would raise $1.2bn (£746m) or more.

There was no comment from AOL Time Warner or Bertelsmann yesterday.