After the recent demise of Reel.com, a number of other troubled online retailers were rumored to be on the brink of collapsing, such as Amazon and CDNow. Now, the German media giant Bertelsmann has agreed to buy up CDNow entirely for no less than $117 million. This news is interesting on a number of levels. For one it obviously begs the question, which benefits Bertelsmann gets out of buying an obviously insolvent and non-performing business, and secondly, it raises questions about the price paid. How can a company that has never been generating profits, accumulating more depths by the hour potentially have a value of $117 million? I guess only the strategists at Bertelsmann can answer that question.
As part of the agreement, which is yet another example of the ongoing shakeout occurring in the once high-flying dot-com market, CDNow will become a wholly owned subsidiary of Bertelsmann’s e-commerce group. The unit was established earlier this year in an effort to bolster the media giant’s Net content and online entertainment business.
Under terms of the deal, Bertelsmann said it will begin a bid for all CDNow common stock for $3 per share in cash. Following the completion of the offer, Bertelsmann intends to start a second-step merger in which all remaining CDNow shareholders will get the same cash price paid in the tender offer. In addition, Bertelsmann will give CDNow about $42 million in advance financing to pay off its existing loans and to fund the company’s ongoing operations until the close of the transaction.
The deal, which has already received unanimous approval from CDNow’s board, is subject to customary closing conditions and regulatory approval. The companies expect the transaction to close during the fall of 2000.