Universal Music to Acquire EMusic

Vivendi Universal SA’s Universal Music Group agreed to acquire EMusic.com Inc., one of the best-known sellers of music on the Internet, for about $24.6 million in cash.

The acquisition comes as little surprise. Last Thursday, Emusic announced it had signed a “nonbinding letter of intent” to be acquired by a “major publicly held media company in a cash transaction.” Shares of EMusic soared for two days on news reports that pegged Vivendi Universal (V) as the acquirer.

The purchase is expected to give Universal Music, and by extension its Duet subscription-music service, a catalog of music from independent record labels and from artists such as rootsy singer-songwriter John Hiatt who have chosen to distribute online versions of their work on EMusic.

Duet is a joint venture between Universal Music and Sony Corp.’s (SNE) Sony Music Entertainment announced last year. Last week, Yahoo! Inc. (YHOO) announced a nonexclusive marketing agreement to promote the song catalogs of the two big record labels on its online-subscription music service.

Vivendi Music has been expanding its efforts to distribute music online after a recent clampdown on the sharing of copyrighted music at Napster Inc.’s controversial Web site.

EMusic tried to take the high road by hashing out licensing agreements for the music downloads it sells, which helped EMusic avoid the wrath of the recording industry. Rival online music distribution outlets MP3.com Inc. (MPPP) and Napster weren’t as lucky.

But EMusic, which announced another round of jobs cuts earlier this year, has been hurt by a slow takeoff for sales of downloaded music, much of which can be found on the Internet at no charge through services such as Napster. It also has been affected by a slump in advertising on the RollingStone.com site, which EMusic operates.

Under the deal, Universal Music is offering 57 cents a share for EMusic’s (EMUS) shares, a 30% premium to Emusic’s 4 p.m. EDT trading price of 44 cents Friday. Emusic has about 43.2 million shares outstanding.

Universal Music will acquire Emusic’s shares by beginning a tender offer on or prior to April 20.

The deal has been unanimously approved by Emusic’s board. Directors of Emusic, along with current and former officers owning a total of about 17% of the company’s outstanding shares, also have agreed to tender their shares.

Under the merger agreement, Universal Music must complete the offer if a majority of EMusic’s diluted shares are tendered. The offer also is conditioned on EMusic having minimum cash and marketable securities, excluding transaction costs, of $5 million on April 30, reducing by no more than about $48,000 each day until the offer closes.

Either company can terminate the agreement if the offer isn’t completed by June 25. The deal isn’t subject to the waiting period requirements of the Hart-Scott-Rodino Antitrust Act, the companies said.

In January, EMusic said it would cut 36% of its staff in a restructuring that included the departure of three senior executives. The latest staff cuts affected 66 workers. The company cut 20% of its staff in June.

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