Geneva, Switzerland





Take Bill Clinton’s Memoirs, the Best Seller DaVinci Code, and a Group of European Television Stations That Go From One Strength to Another, Mix Them All Together and What Do You Get...
Germany’s Privately-Held Bertelsmann, Now Virtually Debt-Free With 2 Billion Euros In Cash At the Ready

Philip Stone 

By any standard, the 2004 performance of the entire Bertelsmann Group – with major properties in Europe and the United States – would be the envy of any global media group. But with its RTL television group, Europe’s largest TV broadcaster, turning in profits dwarfing those of its other units there are indications that the company is returning to its European geographical roots.

Total group revenue for 2004 was €17 billion with net income increasing more than sixfold to  €1.2 billion. Not bad for a company that spent its first 100 years publishing fairy tale books and evangelical pamphlets.

RTL, boosted by its purchase of M6 in France, saw 2004 revenues increase to €4.9 billion, some 10% higher than 2003, but with operating income growing to €668 million, a 33% improvement. RTL launched its third station in Belgium (Plug TV), founded RTL Televizija in Croatia, and bought a stake in the Portuguese Grupo Media Capital.

Comparing the RTL performance with how the company’s major US businesses faired gives an indication why the company appears to believe the “real money” is in European television.

Random House, the world’s largest book publisher that last year printed Bill Clinton’s memoirs, selling 2.6 million copies, and also published the fictional best seller DaVinci Code (which may now see even greater sales since the Vatican has publicly damned the book) saw profits increase by 21% to €140 million on basically flat sales. Bertelsmann’s 50% ownership of BMG, the music division that merged with Sony’s music division to become the world’s second largest label, saw profits triple last year but only because of heavy cost cutting in the Sony unit, and actual sales were down. Bertelsmann did book a tidy  €174 million profit by selling its US headquarters in Times Square.

But for all that, RTL operating profits were twice the combined profit of Random House and BMG.  CEO Gunter Thielen says he is  scouting for more television acquisitions in Eastern Europe and also Asia, and he was looking to do it from internal funding. Interestingly, its Gruner & Jahr unit has been busy the past couple of years divesting itself of its East European newspaper operations.

But Thielen  may have a chance to spend some of his war chest first in the UK. Bertelsmann, which already owns 64.6% of the terrestrial Channel 5 would like to take 100% ownership. United Business Media, the holder of the remaining 35.4%, has long demanded a premium for its shares and the figure now on the table is said to be close to €320 million.

Thielen showed in the past he is willing to walk away from a deal if he thinks it is too expensive (he dropped out of the bidding for Czech station TV Nova when he thought the price had gotten too high) but it is an open secret RTL would like to have 100% of Channel 5, but it is willing to bide its time until the price is right.

Looking to the future, the company is exploring closely how to develop an online computer game business. It believes the success of such a business will depend on how well it can converge with its television stations, but exactly how to do that is not yet clear. The company is also looking at getting into the mobile phone business.

All of this is a far cry from 2002 when the company’s US operations were going from one disaster to another. Former CEO Thomas Middelhoff, the brains behind the RTL business, wanted to make Bertelsmann truly international, but things were not going well in the US.

He invested heavily in Internet enterprises such as Napster, which had started life as an illegal means of downloading free music files on the Internet. The recording industry sued Napster, basically got it closed down, and then Bertelsmann invested to make it a business in which people would pay for their downloads. He invested millions in other other e-commerce businesses such as the book-selling discounter bol.com, and Random House and BMG were losing money. Almost forgotten now is how he turned a small investment in AOL into $7 billion by selling out when the share price was reaching its peak.  

But Middelhoff’s greatest “crime” was that he wanted to take Bertelsmann public so he would have shares to pay for major expansion. But the Mohn family in Germany, which owns some 75% of the company via a foundation (the other 25% is held by Groupe Bruxelles Lambert, a Belgian investment group), wanted to keep things private, and out went Middelhoff, a decision that at the time was seen by many analysts as a big mistake.

But Thielen, by concentrating on making each business unit profitable rather than looking for rapid expansion, has turned the company around in three years. Thielen said the outlook was for all business units to make higher operating profits in 2005 and he expected the company to increase its return on sales to 10% within three years.

Given Bertelsmann’s success, and Thielen’s forecast of better things to come (Q1, 2005, already is looking very healthy), he was asked last week if an IPO might now be in the offing.

He said he saw no reason for that, at least in the short term, and none of the owners had indicated they wanted it.

And with the freedom staying private provides, and profits growing very nicely, he might have added, “And why should they!”

© Philip M. Stone of  Stone & Associates, a partner in followthemedia.com


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