It's a big year for Bertelsmann

RTL Group drives revenue; music is rare sour note

Bertelsmann posted record earnings and profits in 2006, a year in which the German media giant and its owners, the Mohn family, consolidated their control of the company.

Revenue jumped 7.9% to a high of €19.3 billion ($25.6 billion), and net profits more than doubled to €2.4 billion ($3.2 billion), the company said Wednesday.

A rebound in the European television market and the €1.6 billion ($2.2 billion) sale of music publishing business BMG Music Publishing to Vivendi helped buff up Bertelsmann's bottom line.

The one black mark was the recorded music business, which continues to struggle. Restructuring at music division BMG cost Bertelsmann €54 million ($71.8 million) last year, but the business continued to shrink. BMG earned €2 billion ($2.7 billion) in 2006, down from €2.1 billion a year earlier, and EBITA profits slipped from €177 million in 2005 to €173 million ($230 million).

Bertelsmann also was hit by the €48 million ($64 million) out-of-court settlement reached with Universal Music Group in connection with Universal's Napster lawsuit. Bertelsmann has put aside another €101 million ($134 million) for possible future settlements.

Despite all this, company CFO Thomas Rabe said Bertelsmann has no plans to get out of the music business or to exit Sony BMG, its 50-50 joint venture with Sony Music.

It was a much brighter picture at television division RTL Group, which continues to be Bertelsmann's biggest earner. An advertising rebound in the German market, the strength of French channel M6 and the continued huge success of "American Idol," from RTL Group subsidiary Fremantle Media, contributed to a 10% jump in revenue, which reached €5.6 billion ($7.5 billion), and EBIT profits, which were €835 million ($1.1 billion).

Return on sales at RTL Group was 14.8%, compared with 9.7% for Bertelsmann's divisions as a whole.

Bertelsmann CEO Gunter Thielen defended what was the company's biggest financial deal — last summer's €4.5 billion ($6 billion) buyback of 25.1% of Bertelsmann shares from Belgian investor GBL.

"We see now that the price was appropriate and that, were we to do the deal today, the stake would be valued at a much higher level because we have grown the company," Thielen said.

Bertelsmann noted that it has set up a €1 billion ($1.3 billion) investment fund together with Citigroup Private Equity and Morgan Stanley Principal Investments, with Bertelsmann providing half of the investment capital. The new fund will fund the purchase of minority stakes in startup media companies.

"We will go where the customers go," he said.

Thielen singled out China as the territory in which Bertelsmann expects to see the strongest growth. "At the moment, China is the fifth-largest television market in the world. In three years, it will be a bigger market than Germany," he said.

Bertelsmann is expanding on all media fronts in China. Last year's acquisition of Chinese group Boda by subsidiary Gruner + Jahr made Bertelsmann China's second-largest magazine publisher.

Bertelsmann executives made it clear that the company is carefully avoiding confrontation with Beijing by focusing on such nonpolitical media as pop music and fashion magazines.
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