Napster Sale Hearing Set Amidst Objections

Barring a last-minute ruling from the bankruptcy court on objections to its
asset bid, Bertelsmann’s purchase of the controversial file-sharing service
Napster will be completed by this weekend.

An asset sale hearing has been scheduled for August 29 when a Delaware
Bankruptcy Court judge will rule on objections by Napster’s creditors to
Bertelsmann’s almost guaranteed purchase of the rogue P2P service.

After Napster filed for
Chapter 11
protection in June, an asset sale was scheduled to be held
Tuesday but the auction did not attract any takers to outbid Bertelsmann’s
$14 million offer. But, a new controversy has erupted over the way the
court has interpreted Bertelsmann’s bid, which totaled in excess of $85

While the details of the creditors’ objections remain sealed, it is
well-known that a coalition of creditors including the Recording Industry
Association of America (RIAA) want the court to rule that Bertelsmann’s $85
million investment should be treated as equity, and not a loan.

The German media giant had bankrolled Napster through much of its legal
trouble with the music industry and, when the site decided to file for
Bankruptcy protection, Bertelsmann inked a
to pay $8 million for the assets.

If the judge rules that the Bertelsmann investment is not a loan, the bid
would be in the vicinity of $9 million and could reopen the bidding process,
according to Rick Chance, managing director of Trenwith Securities, the investment bank
appointed by the court to generate interest in the asset sale.

Chance told the controversy exists over the
interpretation of Bertelsmann’s bid. He declined to speculate on the
outcome on Thursday’s sale hearing, nothing that it could merely be a
formality because there were no competing bidders.

“It (the sale of Napster) should be finished on August 29. Typically, it’s
just a formality after the Judge hears the objections. He will either
overrule and confirm the sale or will some take time to consider the
objections,” Chance said.

If the Judge interprets Bertelsmann’s previous investments as equity, he
could uphold the creditors’ objections and set up a new auction, Chance

Chance, who was chosen by unsecured creditors to attract competing bids, was
trying to woo a minimum $25 million offer but he said there was not enough
time to properly market the assets.

“We had limited time. We only had eight days to market the assets and
attract bids. Plus, there was the uncertainty about how the bid of
Bertelsmann would be interpreted,” he explained.

If Bertelsmann wins out in the Bankruptcy court proceedings, Napster’s
creditors stand to split only about $9 million from the sale.

Napster, which vowed to turn itself into a money-making music subscription
service when services such as MusicNet and pressplay were created by the Big
5 record labels, has been inactive online since last year after a federal
court in San Francisco ordered it to remove pirated music from the service.

The latest on Napster’s asset sale comes on the same day a new report said
CD music sales dropped 7 percent during the first half of this year because
of the availability of free music on file-sharing services.

The report by PricewaterhouseCoopers said the decline cost the music
industry in excess of $280 million in annual sales.

Separately, the RIAA issued a survey of its own showing consumers between
the ages of 12 and 54 bought fewer CDs and continued to download pirated
music files from the Internet.

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