Sony and BMG forge £5bn music giant

New record company will challenge Universal for top spot. Pressure on EMI to seal Warner tie-up

Sony of Japan and Germany's Bertelsmann yesterday unveiled plans to combine their recorded music operations in a move that will bring Britney Spears and Beyonce under the same roof.

The move will create a group with a 26 per cent share of the world market and sales of up to £5bn, putting it on a par with Universal.

The deal will intensify pressure on EMI to conclude its long-awaited tie up with Warner Music, but it will also come under intense scrutiny from regulators in Europe and the US.

Sony and Bertelsmann confirmed yesterday that they had signed a non-binding letter of intent to form a jointly owned recorded music company to be called Sony BMG. While rival business EMI - home of Robbie Williams - was said to have lined up a $1bn funding package with its banks to help it buy Warner Music, Time Warner's music arm, a deal has yet to surface.

It is extremely unlikely, however, that both deals will get regulatory approval since they would cut a five-player industry down to three players, analysts cautioned.

Universal Music - the business behind Eminem and U2 - is currently the biggest player in the industry with a market share of about 26 per cent.

"I don't think the regulators would agree to such concentration - three companies effectively controlling the whole market," said Jesper Jensen, an analyst at Panmure.

Faced with falling sales as more and more people download music from the Internet, all five companies have been looking at ways of restoring their fortunes. In light of that, they would most likely argue that consolidation should be viewed more favourably.

Bertelsmann and Sony said yesterday that their planned 50:50 venture - a combination of Bertelsmann's recorded music division BMG and Sony's Sony Music Entertainment - would not include the companies' music publishing, physical distribution and manufacturing businesses. The pair warned that "consummation" of the deal remained subject to a number of conditions including approvals of the regulatory authorities in the US and the EU.

EMI, meanwhile, is still hoping to clinch a deal with Time Warner's music arm although that company is rumoured to be holding discussions with others as well. EMI announced in September that it had entered "non-exclusive discussions" with Time Warner about a possible transaction involving the recorded music division, but said discussions were at a very early stage.

City analysts remained unconvinced yesterday that either the EMI/Warner deal or the Bertelsmann/Sony transaction would get past the regulators, not least because EMI's last attempts to purchase rivals have ended in tears.

EMI's attempt to merge with Warner Music was blocked by the competition authorities three years ago, and regulatory issues were also thought to have been behind the reason why talks with Bertelsmann never got off the ground.

Kingsley Wilson, an analyst at Investec, said: "There' would be a case for arguing that consolidation from five down to four is not going to be to the detriment of consumer well-being. However, to argue that five down to three is sensible is harder. The chances of both [mergers] going through, I think, would be extremely slim."

He also pointed out that EMI's plans were still far from certain. "That deal is by no means certain. There are three hurdles here - can they fund a deal - which they now seem to be able to, can they agree a deal, and will it go through?" he said.

Mr Jensen thought that to get even one of the proposed deals past the regulators, the authorities would, at the very least, force the companies to make a raft of disposals.