German media group Bertelsmann in profits plunge

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COLOGNE, Germany -- The profit plunge announced Tuesday by German media giant Bertelsmann reads like a tale of two companies. Net income at Bertelsmann fell to 216 million euros ($341 million) from 2.14 billion euros a year earlier and revenue was off 2.6% at 18.8 billion euros ($30 billion).

Bertelsmann's more traditional businesses -- including its music and book club operations -- took it on the chin, with profits in near freefall.

But the company's television division RTL Group saw across-the-board growth and operating profits up to 978 million euros ($1.5 billion) from 835 million euros a year earlier.

Major write downs and a series of one-off items, including the cost of settling its Napster lawsuits with EMI and Warner Bros., chipped away at Bertelsmann's bottom line. Comparisons with 2006 are slightly misleading as 2006 was a record year for the German group, with the 1.63 billion euros sale of its music publishing business to Vivendi helping to buff its balance sheet.

Stripped of its music publishing sales, revenues at Bertelsmann's music division (the company controls 50% of Sony BMG) fell a staggering 27.8% to 1.5 billion euros ($2.4 billion) and operating profit (EBIT) drop from 173 million euros to 93 million euros ($147 million). While the sale of digital music jumped 40%, that did not make up for a 17% decline in sales of traditional music discs.

It was a similarly dire story at Bertelsmann's music and book club business, called Direct Group, where revenue fell 3.7% to 2.6 billion euros ($4.1 billion) and operating profit plunged from 110 million euros to just 10 million euros ($16 million) last year.

Bertelsmann wrote down 414 million euros ($653 million) at Direct Group in North America, reflecting the lower value of its assets there.

Bertelsmann's CEO Hartmut Ostrowski said he was considering "all options" for the company's club business including selling the unit off. A decision has already been made for Direct Group's North American division, which Bertelsmann CFO Thomas Rabe said would go on the block in the coming weeks.

But Ostrowski put a brave face on the figures, released Tuesday, arguing the company had "removed risks" such as the Napster lawsuits (settled for a total of 245 million euros ($387 million) in payouts and legal costs) that could have hindered further growth.

CFO Rabe estimated that the Napster payments helped to avert at $17 billion class action suit by record labels against Bertelsmann, whose financial assistance extended the online life of the infamous file-sharing site.

Ostrowski forecast a doubling of net profits in 2008 although he expects only a "moderate upturn" in revenue.

Direct Group might not be the only Bertelsmann operation to get the axe. Ostrowski, who took over as head of the media group this year, has said he may sell off underperforming operations in order to pump money into fast-growing businesses such as RTL or Bertelsmann's service unit Arvato.

Ostrowski has set Bertelsmann the ambitious target of 30 billion euros ($47 billion) in revenues by 2014. To hit that mark, Bertelsmann's new boss may have to chop out a lot of dead wood.
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