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March 21, 2007 4:10 pm

Bertelsmann draws funds into family

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When Liz Mohn, the matriarch behind Europe’s largest media group, averted an initial public offering last year by buying out Bertelsmann’s only non-family shareholder, many outsiders assumed this would come at a strategic cost.

Without access to equity markets and with an onerous debt load, it looked as though Bertelsmann might struggle to make any big acquisitions for years, tying its hands just as the other sleeping giants of Europe’s media industry were beginning to stir.

But Bertelsmann has bounced back with an unexpected plan to tap the pool of private equity funding that is shaking up the corporate landscape.

The decision opens new options for the company as it faces a change of leadership and could reposition one of the sector’s most traditional groups as one of its financial innovators.

Bertelsmann shed jobs following the expansionist era of Thomas Middelhoff, Gunter Thielen’s predecessor as chief executive.

Now, as Mr Thielen prepares to hand over to Hartmut Ostrowski, head of its Arvato services division, he says it is positioned for “a new period of growth”.

He has also given Thomas Rabe, Bertelsmann’s 41-year-old chief financial officer, significant influence over the group’s future as head of the new fund.

Mr Rabe has already hogged the limelight by designing the strategy that will allow Bertelsmann to pay down the €4.5bn buyback costs within 18 months, funded only by the sale of its €1.63bn music publishing business, higher cash flows and lower dividends for the Mohn family.

If his strategy works, it should allow Bertelsmann to place small bets – equivalent to 10 per cent of its annual acquisition budget – but give it the option to examine businesses for a few years before deciding whether to take full control or sell out.

Some of those investments could form new divisions, helping answer the question of where growth would come in a business still heavily exposed to traditional businesses such as book clubs.

Mr Thielen said on Wednesday: “We want to keep a broad portfolio and I don’t exclude that we might have an additional [division] at some point.”

The new fund, alongside a €50m venture fund that is making small investments in new media start-ups, are part of a concerted effort to change Bertelsmann’s reputation for being slow to adapt to the challenges of the digital age.

The new structure is not without risk. Debt taken on by the vehicle will be kept off Bertelsmann’s balance sheet and, with equity representing 25-30 per cent of the total bid package, leverage is likely to be more cautious than in some private equity deals. But it will still increase Bertelsmann’s potential exposure to any sharp change in credit markets.

Conflicts of interest could arise if the fund starts pursuing targets also being eyed by Bertelsmann subsidiaries.

There are also reputational risks. Bertelsmann has long prided itself on its social responsibility, boasting of how many people it employs as rivals boast of their job-cutting prowess.

It is acutely aware of the controversy over what German politicians have described as the “locusts” of private equity, and was eager to stress on Wednesday that it wanted to build companies rather than strip them.

Such sensitivities highlight Bertelsmann’s unusual culture.

Insiders made clear that they believed its private status gave it the unique ability to establish the private equity partnership announced on Wednesday.

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