Time Warner Inc. (NYSE: TWX) and Sony Corp. (NYSE: SNE), which jointly own the Columbia House music service, said Monday they would kill their merger pact with online retailer CDNow (Nasdaq: CDNW).
CDNow said the merger's termination will allow it to focus on its primary business of brand building. The company retained Allen & Company to explore other strategic opportunities.
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Under the new arrangement, CDNow will remain an independent public company with continued ties to Time Warner, Sony and Columbia House. Time Warner and Sony have agreed to commit $51 million to CDNow, through $21 million in cash as an equity investment and the conversion of an existing $30 million short-term loan commitment into long-term convertible debt.
"We are obviously disappointed that the merger originally envisioned last July will not be completed," said Jason Olim, CEO of CDNow. "However, we feel the termination of the merger is the best move for CDNow and its shareholders."
Shares of online music retailer CDNow Inc. (Nasdaq: CDNW) closed at 9 7/16 Friday. The stock fell after the company initially announced it would merge with Columbia House, which is jointly owned by Sony and Time Warner, last July.
A few cracks in the deal were revealed on CDNow's fourth quarter earnings conference call last month. CDNow missed estimates in the quarter with an operating loss of 85 cents a share.
Officials said on the fourth quarter call that the Columbia House merger was expected to close in the second quarter. Initially, the deal was supposed to close in the first quarter. While the Columbia House merger was in limbo, America Online (NYSE: AOL) merged with Time Warner. AOL and Time Warner executives also waited two weeks before they said they supported the Columbia House-CDNow merger.
Shares have continued to crumble as investors have speculated on how the Time Warner-AOL deal will affect CDNow.
Although the Columbia House merger is off, CDNow does get what it needed most -- cash. CDNow had about $20.6 million in cash at the end of the fourth quarter compared to $49 million a year ago.