Record earnings for Bertelsmann in '06


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

Revenue jumped 7.9% to a new 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, from €2.1 billion a year earlier and EBIT profits slipped to €173 million ($230 million) from €177 million in 2005.

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 that Bertelsmann has no plans to get out of the music biz 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 mega-success of "American Idol," from RTL Group subsidiary Fremantle Media, contributed to a 10% jump in both revenue, which reached €5.6 billion ($7.5 billion) and EBIT profits, which were €835 million ($1.1 billion) for the year.

Return on sales at RTL Group reached 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.

The share buyback swelled debt at Bertelsmann from €3.9 billion to €6.76 billion ($9 billion), well above the conservative debt-to-operating EBITDA target of 2.3 or lower the company had set for itself. At the end of 2006, the ratio stood at 2.8.

Rabe said Bertelsmann will be "very close" to the 2.3 target by the end of 2007, thanks to the BMG Music Publishing sale and increased returns at individual divisions.

"At that point, we will again have financial scope of between €1.2 ($1.6 billion) and €1.5 billion ($2 billion) per year for acquisitions and €700 million ($900 million) for other ongoing investments," Rabe added. "This translates to a total investment volume of €6 billion ($8 billion) by 2010."

In addition, Bertelsmann 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.

Thielen was optimistic but vague regarding Bertelsmann's prospects, saying only that the German group will continue to invest and expand in new digital and online media, exploiting its established "old media" brands. "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," Thielen 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.

While Bertelsmann executives were loath to reveal exact figures for their Chinese operations, they made it clear that the German company is carefully avoiding confrontation with Beijing by focusing on such nonpolitical media as pop music and fashion magazines.