Retailers shift their ad spending from TV, radio and print ads to digital ads.
CDNow Inc. has entered into a definitive agreement with Sony Corp. of America and Time Warner Inc. to merge with Columbia House, the leading club-based direct marketer of music and videos, which is owned equally by Sony Corp. and Time Warner Inc. The new public company resulting from the merger will be owned 37% each by Sony and Time Warner. CDNow's existing stockholders will own the remaining 26%. Backed by two of the world's largest media companies, the merger will create a major entertainment, e-commerce and direct marketing company by bringing together a leading music Web destination and the largest music and video club in the U.S. and Canada. Sony and Time Warner will make the new company an integral part of their overall e-commerce activities.
CDNow shareholders will benefit from the new company's ability to leverage the cross-promotional strengths and full resources of Sony and Time Warner to lower its customer acquisition costs and boost its customer base, providing an e-commerce model with a sound economic basis. Subject to the terms of the relevant agreements, Sony and Time Warner have made significant strategic commitments to the new company. The two companies' music-controlled web sites will be linked to the new company's online retail web sites, enabling music fans to sample content relating to their favorite artists and genres and then make a purchase with the click of a mouse. Sony and Time Warner will provide the new company with opportunities to purchase a broad array of advertising from the two companies' vast media properties. The considerable content-related resources of Sony and Time Warner will help enrich the entertainment content of the new company's e-commerce sites to create an exciting and entertaining environment for consumers. Sony and Time Warner have also agreed to provide certain financing guarantees to afford the merged company financial flexibility to address its future capital needs and growth plans.
The new company will have a 12-member board of directors, composed of four designees each from Sony and Time Warner, CDNow's President and CEO Jason Olim, two independent directors, and the CEO of the new company.
A search is currently underway for the CEO of the new company. Jason Olim will serve as CEO of the new company's Online/Retail division and Richard C. Wolter, chairman and CEO of Columbia House, will continue to head the club operations of the new company as CEO. After a transition period, Jonathan Diamond will leave the new company to pursue other opportunities.
The board of directors of CDNow has unanimously approved the merger. The merger agreement is subject to CDNow's shareholder approval and customary conditions, including clearance by U.S. and Canadian antitrust authorities. The parties anticipate completion of the transaction by year end.
In 1998 Columbia House had net revenues of approximately $1.4 billion and earnings before interest, taxes, depreciation and amortization of intangible assets (EBITDA) of approximately $100 million. Last year, Columbia House directly distributed approximately 200 million music and video units to its membership base from its existing fulfillment operations. Columbia House has experienced rapid growth in its online music and video clubs (columbiahouse.com). Columbia House's online revenues have also grown rapidly, and are projected to total approximately $100 million this year.
CDNow, which currently serves an online music community of 2.3 million customers, was formed by the merger of CDNow Inc. and N2K Inc. in March of 1999. CDNow had revenues of $98.5 million in 1998 and estimated revenues of approximately $71 million during the first six months of 1999, both stated on a pro forma basis combined with the results of N2K for the periods prior to the merger.