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Stock Analyst Update

Bertelsmann Picks Up CDnow on Sale

Deal is humbling for e-tailer, a coup for the German giant.

Beleaguered online music retailer CDnow (CDNW) ended its months-long search for a buyer Thursday when it agreed to be bought by German media conglomerate Bertelsmann AG for $117 million, plus $42 million to pay off its debt. The deal is humbling for former Internet darling CDnow but a bargain for Bertelsmann, which gains another platform to push its music and books.

CDnow has been on the verge of running out of cash ever since a merger with Columbia House (owned by Time Warner (TWX) and Sony (SNE)) collapsed this spring. For the past several months, it has been actively seeking a buyer or partner to help it stay afloat. But although it has one of the best-known and most visited retail sites on the Web, CDnow's shaky financial situation scared off potential saviors. The company lost $120 million last year on $140 million in revenue, and its gross margin was a paltry 15.6%.

In the end, Bertelsmann paid less than one tenth of CDnow's peak valuation--and according to CDNow CEO Jason Olim, Bertelsmann's was the best offer. The agreement will aid Bertelsmann's efforts to build a strong online presence as a seller of the books, music, and information it produces. Bertelsmann already owns 40% of Barnesandnoble.com (BNBN) and all of European online bookseller Bol.com, and it has partnered with America Online (AOL) to provide Internet service in Germany.

Bertelsmann has plenty of cash to subsidize CDnow until it starts paring its losses. If this merger works well, other old-line media companies will undoubtedly start looking harder for distressed e-tailers to snap up at bargain prices.