PETER GABRIEL, the rock singer and former Genesis frontman, made an estimated £6 million from the sale of On Demand Distribution (OD2) to Loudeye Corporation in an all-shares deal worth $57 million (£31.3 million).

Mr Gabriel co-founded OD2 — which powers music download services for companies such as HMV and Coca-Cola — four years ago in partnership with Charles Grimsdale. Mr Grimsdale himself could take home up to £4.7 million depending on the final terms of the sale.

Loudeye, listed on Nasdaq, boasts the world’s biggest collection of digital songs, with 4.6 million tracks, many of which are sold to services such as iTunes.

The deal follows the launch of well-funded music download services such as Apple’s iTunes and Roxio’s Napster, which record companies see as a potential saviour of the industry as it fights declining CD sales caused by illegal file-swapping and piracy.

Braced for a competitive onslaught, OD2 earlier this year hired Broadview International, the investment bank, to explore various funding options, including a potential sale or an initial public offer. Loudeye will pay $20.7 million upfront plus $17.5 million over the next 18 months, with up to another $18.8 million depending on performance over the next two years.

Mr Gabriel owned almost 20 per cent of OD2, having provided about £1 million in funding, while Mr Grimsdale owned about 15 per cent. They will both receive Loudeye shares that can be sold at any time. Quester and NIF, two private equity firms, owned about 50 per cent after providing the bulk of a £6.2 million capital raising in 2000.

Mr Grimsdale, who will head Loudeye’s business outside the US, said the deal would allow OD2 almost to quadruple the size of its music catalogue from 350,000 songs to more than 1.3 million within months. That boost will give OD2’s three dozen customers around Europe almost double the offering of iTunes and Napster, which boast about 700,000 tracks each.

The company will also provide other Loudeye services, such as anti-piracy technology, and branch into mobile phone download services.

Loudeye already counts large US retailers such as Amazon.com among its customers. The company has spent almost $200 million on digital content technology and an archive of music and film.

In the quarter to March 31, OD2 generated sales of $2.5 million — 80 per cent up on the previous quarter.

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