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Investors hankering after Bertelsmann shares should not hold their breath. Liz Mohn, matriarch of the controlling dynasty, seems set on stopping the listing flagged by the media giant’s other shareholder – even if this incurs the wrath of her executives.
Though Gunter Thielen, chief executive, signalled in April that Bertelsmann might sell assets in order to finance buying back the 25.1 per cent stake held by Groupe Bruxelles Lambert, Ms Mohn is now mulling borrowing up to €4bn ($5bn) instead.
The difference is far from academic. Mr Thielen’s course was designed to meld a strategic reappraisal being conducted by executives with the needs of its main owner. Ms Mohn’s idea threatens opportunities her managers have worked hard to forge.
After the tenure of Thomas Middelhoff, Mr Thielen took over in mid 2002. Mr Thielen earmarked €2bn for renewed acquisitions from 2004 to 2006.*
His executives jumped at the chance. RTL, the TV unit, bought out the remaining shareholders in UK channel Five; book business Random House bought publishers in Germany, as did magazine unit Gruner + Jahr; print and services unit Arvato invested abroad.
Then-chief financial officer Siegfried Luther warned last spring that a debt-financed buy-back of GBL’s stake would “limit all further” possibilities for such strategic expression.
The issue seemed to have been settled. Then it reappeared last week. “The executives can’t be happy,” said a banker who has worked with Bertelsmann in the past. “It might be OK for Thielen – he’s leaving. But what about the young guys?”
Company statutes stipulate Mr Thielen must pass on the baton when he turns 65 in August next year at the latest. This means tensions with its owners might be peaking just as the company is preparing to orchestrate a harmonious generational change.
Hartmut Ostrowski, 48, widely tipped as a front-runner in the race for succession, has been a steady beneficiary of investment as head of the Arvato services unit. It has grown from 3,000 to 17,000 staff since the early 90s, when he first joined.
Thomas Rabe, the 41-year-old successor to Mr Luther, said at his first press conference as a board member in March that he would continue with a cautious debt policy in order to guarantee an annual €1bn for investment from Bertelsmann’s free cashflow.
Ms Mohn is understood to be considering a buy-out plan that could keep the company’s debt at investment grade, though servicing big new loans would still divert substantial resources away from investments being planned by the media group’s executives.
Standard & Poor’s rates Bertelsmann’s long-term debt at a stable BBB+ and reckons net debt reached €6bn, or 2.7 times operating earnings, in 2005. If you add billion-euro loans, it is easy to see why Mr Thielen and colleagues may not be happy. But Ms Mohn is not known for minding what her executives think. She was instrumental in the 2002 departure of Mr Middelhoff, the man who in 2001 brought GBL aboard in return for the Belgian group’s remaining stake in the lucrative RTL.
What is said to worry her about asset sales is that buyers will not now pay full price. Bertelsmann executives had hired Citigroup and JPMorgan months ago to look at strategic options for music publisher BMG and the half-share in music company Sony BMG.
Borrowing to finance any deal with GBL would mean strategic considerations about the company’s future in the music business would be disconnected from Ms Mohn’s money worries.
That is the theory. Now only GBL and its controlling shareholder, Belgian financier Albert Frère, have to play along. One condition of a debt-financed deal would be a sale price of well below €4bn for the GBL stake. Borrowing more would be hard even for Ms Mohn to shoulder. This jars with the €5bn plus GBL is said to be considering as the return on an initial public offer it has tentatively scheduled for early 2007. So Ms Mohn will have some persuading to do when she meets Mr Frère for Bertelsmann’s annual shareholder meeting on May 22.
*This paragraph has been amended for legal reasons