WMG, SME sell stakes in Columbia House

Major labels Warner Music Group and Sony Music Entertainment have sold off an 85% stake in direct-mail retailing giant Columbia House to Gotham-based investment group Blackstone Capital Partners at a price of slightly more than $400 million.

Deal, which leaves WMG and SME with passive investments in Columbia House of 7.5% each, is an acknowledgment of a dramatic shift in the company’s business away from music and toward the lucrative DVD market.

“Sony and Warner both realized Columbia House was not likely to realize its full potential under joint ownership, and that the total value was likely to be enhanced by Blackstone’s leadership,” said Columbia House chairman and chief exec Scott Flanders, who recommended the deal with Blackstone.

Exec team to stay

Flanders said the company’s entire existing executive team would remain in place, and that Columbia House would continue to count Sony and Warner as suppliers of music and video content to the service.

However, the sale will allow the company to strengthen distribution ties with competing congloms, he added. It will also let Columbia House chart its own path strategically, without being subordinated to the needs of a larger media giant.

That path will likely include an even more dramatic shift in the product mix from music toward video, and specifically the fast-growing DVD format for Columbia House, already the largest direct marketer of DVDs videotapes and music.

Thanks to aggressive pricing out of the gate, DVDs have gone from half of Columbia House’s video sales last year to more than two-thirds this year, Flanders said. And as prices continue to decline, he expects more consumers to opt for buying DVDs, rather than renting them from chains like Blockbuster.

“Blockbuster’s revenues were largely flat last year, while ours were up at double-digit rates,” he said. “I think the numbers speak for themselves.”

Blackstone’s private equity group has invested in 60 companies worldwide, in fields ranging from waste management and manufacturing to media and telecommunications. This latest pact, which was partly financed by investment banks UBS Warburg and Banc of America Securities, is expected to close in June.

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