A Luxembourg law that took effect this month has removed an obstacle to Bertelsmann SE’s years-long ambition to win full ownership of Europe’s largest broadcaster RTL Group SA.
The country’s revised takeover rules clarified the procedures for determining the price at which owners of more than 95 percent of a publicly traded Luxembourg company can force remaining shareholders to sell their stock. Bertelsmann, based in Guetersloh, Germany, owns 92.3 percent of RTL.
A buyout of minority investors will give Bertelsmann complete control over RTL’s 1 billion euros ($1.3 billion) in annual cash flow to finance growth. Europe’s biggest media company, with assets ranging from magazine publisher Gruner + Jahr to outsourcing division Arvato, has said it needs to raise debt and equity for acquisitions to reduce dependence on the region and accelerate growth.
“The new takeover law introducing a clear rule for the squeezing out of minority shareholders is a game-changer,” said Margo Joris, an analyst at KBC Securities in Brussels. “The law now offers Bertelsmann the possibility to take RTL private.”
Bertelsmann’s biggest unit by revenue, RTL generated about 60 percent of the group’s earnings before interest and taxes in 2011 and had net income of 696 million euros.
RTL holds 0.76 percent of its own shares, according to data compiled by Bloomberg, leaving the remaining stock that trade on the Luxembourg exchange at 6.94 percent. Based on their closing price on Oct. 12, that stake is valued at 794 million euros.
Judith Hartmann, the former chief financial officer of General Electric’s German unit, joined Bertelsmann as CFO today. Chief Executive Officer Thomas Rabe had kept responsibility for supervising Bertelsmann’s finances after being promoted from the CFO position in January.
“We are keeping all options open regarding our stake in RTL,” said Christian Steinhof, a spokesman for Bertelsmann.
Bertelsmann needs funds for its plans to expand in emerging markets and in businesses such as online education, enterprise data, content rights and TV production, according to its growth strategy presented on Sept. 13.
RTL had 701 million euros of cash and equivalents at the end of June. Its parent’s ratio of net debt to earnings before interest, taxes, depreciation and amortization was 0.9.
Bertelsmann has to buy 1.94 percent plus one share of RTL’s shares to surpass the 95 percent threshold. The price for the remaining 5 percent minus one share would be set at “fair price” by an independent adviser on the basis of an evaluation report, according to the revised law.
KBC Securities’ Joris estimates that RTL shares trade at a 20 to 25 percent premium to fair value, reflecting RTL’s better performance relative to peers and market speculation about a buyback.
RTL fell 0.1 percent to 73.85 euros at 11:21 a.m. in Brussels trading, bringing the decline this year to 4.1 percent. The shares are thinly traded, with an average daily trading volume of 4,288 in the past six months.
The revised law eliminating the legal concerns about a buyout of RTL’s minority shareholders may give Bertelsmann more options, said Freddy Thyes, a Luxembourg-based multimedia consultant and former RTL executive. A full takeover would also make it easier for Bertelsmann to sell parts of RTL and facilitate the valuation of Bertelsmann in an eventual initial public offering, he said, adding that the law is “in no way an RTL law.”
Bertelsmann has made previous attempts to take full control of RTL.
The media company scrapped a public offer plan in 2002 after Luxembourg shareholder group Investas said the 44 euros-a-share offer was too low. Bertelsmann also considered taking 100 percent of RTL in 2007. That was shelved after Bertelsmann found there was “insufficient certainty” that Luxembourg’s takeover law would apply to its offer.
While Bertelsmann said after the withdrawal of the takeover plans in 2007 that taking RTL private remained a “strategic objective,” it considered the option of selling some of its shares in the broadcaster.
Bertelsmann CEO Rabe said in 2008, when he was finance chief, that he could envision reducing the holdings in RTL to 75 percent.
Putting RTL shares on sale and not squeezing out minority shareholders would have risks as analysts are betting on a buyout, according to Joris. “If Bertelsmann decides to sell, RTL’s shares would fall, reducing the potential cash gains from throwing the stock on the market.”
In addition to its stake in RTL, Bertelsmann has full ownership of the publisher Random House Inc., Arvato and 74.9 percent of Gruner + Jahr, Europe’s biggest magazine publisher.
The Mohn family, descendants of Carl Bertelsmann who founded the company in 1835, is still in full control of the conglomerate and has resisted taking it public in the past.
Bertelsmann issued 10-year bonds worth 750 million euros on July 26. The company had about 3.6 billion euros in debt at June 30.
“Bertelsmann set its strategy and now the question is really, what is going to be the big move and how are they going to finance it,” said Christian Aust, an analyst with UniCredit in Munich. “Markets are impatient and RTL offers a possibility to at least partly satisfy Bertelsmann’s cash needs.”