Sony Corp. and Bertelsmann AG became the first to strike in the long-looming music merger race as the two media conglomerates said Thursday they have signed a nonbinding letter of intent to merge their recorded music operations, Sony Music Entertainment and BMG, to form the world's second largest music label, Sony BMG.

The proposed deal would not include the two companies' music publishing, physical distribution and manufacturing businesses.

In a joint statement, BMG and Sony Music Entertainment said the deal would be a 50-50 merger of equals. Sony Music Entertainment chairman Andrew Lack would be CEO of the new venture, while BMG chief executive Rolf Schmidt-Holtz would serve as chairman of the board.

Bertelsmann and Sony would have equal representation on the new board of directors. The deal is conditional on approval from regulatory authorities in the United States and the European Union.

Sony and Bertelsmann did not specify financial aspects of the proposed combination Thursday, such as the exchange of cash or stock. Company officials declined to project cost savings or job cuts from the move.

It remained unclear what issues the two sides must still work out before they can sign a final merger pact and when they expect the transaction to take effect.

The announcement of the proposed merger followed Sony's corporate strategy meeting in New York on Tuesday, where the company detailed significant changes to its entertainment division, including the loss of 1,700 jobs between Sony Pictures and Sony Music.

While speaking at that meeting, Howard Stringer, vice chairman of Sony and CEO of Sony Corp. of America, foreshadowed the announcement saying his company was "seriously discussing opportunities" in the music arena (HR 11/5).

However, admitting that regulators' take on the proposed merger was unclear after past opposition to deals among the top five labels, Stringer added: "We don't know the EU's position."

Industry insiders Thursday were cautiously optimistic about the proposed Sony BMG combination given that it does not represent an outright takeover and elimination of one player.

The flagging music business, hit hard during the past few years by piracy and sales declines, could see some leniency from regulatory officials, some sources said. "Many view this as something to invigorate the industry," one source said.

Sony's music division in particular has been struggling for a couple of years, with sales and profits down, Morningstar analyst David Kathman said.

"They've lost a lot of control," he added. Kathman attributes this mostly to competition from the digital music arena.

Sony has been making efforts to turn around its business, which is the second-largest music label globally. Driven by Lack, brought in less than a year ago under intense scrutiny, Sony has been aggressively cutting costs. As a former NBC top executive and now at Sony Music, Lack has earned a reputation as being focused on strict execution against financial and operating goals.

Stringer applauded Lack's efforts to date Tuesday, saying the executive has already cut $150 million in the cost structure of the conglomerate's music division.

Until a few weeks ago, BMG was close to a transaction with Time Warner's Warner Music Group. But talks broke down at the last moment, leaving WMG to explore other options.

Scott Roxborough reported from Berlin. Kathleen Anderson reported from New York.