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Assuming Bertelsmann Does Sell Its Music Publishing Business for Around €2 billion, Where Does It Find the Other €2.5 Billion Necessary To Pay Off Its Bridge Loan For Buying Out Its Minority Shareholder?July, 2006, is a month the management at German media conglomerate Bertelsmann will not forget in a hurry. Having achieved their goal of buying out its minority shareholder for €4.5 billion it stayed a private company – good news – only a few days later to have its 2004 merger with Sony Music struck down by Europe’s second highest court – bad news because it was thought that business was top of the list to be sold-off to help pay off the buy-out bridge loan.
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Bertelsmann says the court ruling has no affect on selling the music publishing business, but that may not be really true. No doubt management will now be looking to sell to a group that would cause the least competition issues – more likely a private equity house or perhaps a company like Viacom – and one question will be how much “peace of mind” is worth in the accepted price. Also lurking out there is Impala, an independent label group that doesn’t want to see the publishing business go to a major music company. Impala is important – it was they who appealed the SonyBMG merger.
An Impala statement said, “The court identified fundamental problems that go to the heart of the merger and can’t be readily fixed because the music market already suffers from collective dominance…. The independents are also concerned that BMG Publishing may be sold to another major. A trade sale of any major publisher to another would strengthen existing collective dominance in publishing and the functioning of the collective societies, online licensing and synchronization markets. Impala takes the view that any such move would be unable to obtain regulatory approval.”
Bertelsmann now finds itself between a rock and a hard place. In order to buy out the Groupe Bruxelles Lambert and thus remain a private company it took out bridging loans from several banks said to total about $5.8 billion and it has between 12-18 months to pay back the loans.
Can all of these music publishing and music recording issues be settled by the time the loans are due? Loans of course can be extended, but none of this comes cheap.
The European Commission, meanwhile, has decided that Sony and Bertelsmann do not need to restart from the beginning in trying to get their merger reapproved. The commission had originally ruled that based on the court decision the two companies had to renotify their merger intention, but then changed course a week later and said they now just need to update all of the information previously provided with what has happened since the merger was originally approved. Once that information has been filed the EC has a month to decide whether to approve the merger the second time around or to order an in-depth study that would take up to four months.
Depending on when the commission receives the updated information that means that a new decision on whether the merger is possible should be made within a year.
Bertelsmann has said it really doesn’t want to sell its share of SonyBMG, but if it doesn’t then how else would it pay off that bridge loan? One thing for certain – it won’t touch its RTL broadcasting empire. But Grunar & Jahr, Random House and the like – could they all be up for grabs?
Obviously if Bertelsmann was to sell its stake in SonyBMG then Sony has first dibs. Sony President Howard Stringer, when asked whether Sony was interested in taking a controlling stake in SonyBMG (there have been reports that Bertelsmann might make a sale in two stages of 25% each) explained his current dilemma: “At the moment the decision by Bertelsmann as to how they pay back that debt is up to them. And while we are in close negotiations and obviously there are some opportunities for us, in the end they have to decide how they want to go forward.”
And that is exactly Bertelsmann’s problem. How to go forward? Until the music label merger is cleared up, and there is no telling how that will eventually be decided, there’s not much to be done on that front.
But the clock on those loans keeps on ticking.
Hartmut Ostrowski, 48, the very successful head of Bertelsmann’s arvato services division, has been named the company’s new CEO, taking over January 1, 2008, from Gunter Thielen.
Not that Thielen will be far away. He has been named chairman of the company’s supervisory board and also as head the Bertelsmann Foundation that owns 76.9% of the company.
Second to the RTL division, Europe’s leading broadcaster, Arvato produced an operating profit of €431 million in 2005.
“By appointing Hartmut Ostrowski, we acknowledge that fact that tomorrow’s media business will be driven by technological developments,” Dieter Vogel, the current supervisory board chairman, said.
What is also true is that Ostrowski has no experience running a media business, but he does have the reputation in the company as embracing technology which enabled arvato to be so successful with its call centers, IT, CD production, printing and logistics.
Still top of the company’s agenda is reducing its €8.9 million debt brought on partly by its€ 4.5 billion buyout of minority shareholder Banque Lambert Bruxelles last year.
Vivendi Universal has formally requested EU permission to purchase Bertelsmann’s BMG Music Publishing for €1.63 billion ($2.08 billion). If the deal gets the go-ahead it will make Vivendi the world’s largest music publisher.
Meanwhile, the New York Times has reported that Kohlberg Kravis Roberts recently made a €41 billion ($51 Billion) bid to take Vivendi private in what would be the world’s largest leveraged buyout, but discussions between the two sides are no longer active.
Vivendi apparently approached KKR to make a bid, but the talks bogged down on tax difficulties and getting the go-ahead needed from several governments, particularly the French.
Vivendi, the French media and telecoms group, outbid six others to buy BMG Music Publishing for €1.63 billion ($2.1 billion), slightly more than the €1.5 billion that most analysts thought the business was worth. Vivendi had always been considered the front-runner to buy the business.
The deal makes Vivendi, the largest global seller of recorded music, also the largest music publishing company. For Bertelsmann, the $2.1 billion is a start to paying off a $5.8 billion bridge loan it took out in July to buy out the 25% holding of minority shareholder Groupe Bruxelles Lambert. If it had not made that buyout then the minority shareholder said that to maximize shareholder returns it wanted the company to go public, which the Bertelsmann family owners did not want.
And Bertelsmann’s adventure with Internet file-sharing service Napster will cost it $60 million – an amount it has agreed to pay Vivendi to settle litigation.
The BMG purchase is subject to regulatory review, and if approved the money should change hands by the end of year. Bertelsmann still has not announced how it plans to raise the remaining $3.7 billion necessary to pay off the loan.
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