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Wedding called off

Columbia House to invest in CDNow instead

The $1 billion proposed merger of online music store CDNow and Columbia House music club was called off Monday, as the companies announced they would instead partner in a different kind of investment strategy.

Columbia House, which is jointly owned by Time Warner and Sony, will now invest $51 million in CDNow. In all, $21 million of this will be in the form of a stock purchase, and the remaining amount converts a $30 million short-term debt into long-term convertible debt. CDNow will remain an independent public company.

“We are obviously disappointed that the merger originally envisioned last July will not be completed,” said CDNow president and CEO Jason Olim. “However, we feel the termination of the merger is the best move for CDNow and its shareholders. … We all discovered recently that the cash flow for Columbia House is lower and the debt levels are higher to the point that it would prevent us from becoming a successful new entity.”

The stock price of CDNow fell by more than 15% on Monday, to close at $8.

Many reasons

Scott Flanders, chairman and CEO of Columbia House, said a combination of factors led to the demise of the agreement.

“Our business performed slightly below the expectation that we had when the merger was consummated in July, as did CDNow,” Flanders said. “Both companies were weaker than forecasted … but from Columbia House’s standpoint, there were a number of operational and strategic relationships that we could not pursue because this merger was pending since July. With the speed of change in the Internet space, we needed to move forward. But we believe we still have the benefits of the merger with the new strategic relationship we have formed.”

Execs with CDNow said the company has hired investment bankers Allen & Co., the group founded by Microsoft Corp. co-founder Paul Allen, to help it develop “strategic options.” “Allen & Co. does deals for breakfast, lunch and dinner … CDNow has greater product and advertising revenues, a larger customer base, a higher number of visitors per day and greater brand awareness than when it entered the merger agreement with Columbia House last July,” Olim said. “CDNow’s audience is an attractive demographic for major advertisers, and we have consistently experienced strong growth in advertising sales as we have expanded content offering and increased brand awareness.”

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