How A Tv Megadeal Became A Megaflop

Bertelsmann's Dornemann nearly had European TV in his grasp. But he reached too far

Few executives have savored such a sweet triumph--only to see it slip away amid charges of greed, deception, and treachery. On Apr. 2, Michael Dornemann was on top of the world. A managing director of German media giant Bertelsmann, he had just cut a deal to merge Bertelsmann's television business with Compagnie Luxembourgeoise de Telediffusion (CLT), Europe's largest broadcaster, with 12 stations in five countries. It was a coup for the 50-year-old Dornemann, seen by many as Bertelsmann's next chairman.

Better yet, the CLT deal came shortly after another brilliant stroke. Weeks earlier, Dornemann had sewn up a pact with Rupert Murdoch's British Sky Broadcasting and Canal Plus of France to set up a digital-television venture in Europe. The new technology of digital TV can provide viewers with hundreds of channels and novel services, and the company that delivers the technology first could corner a giant new market. Dornemann had taken Bertelsmann, just months earlier a stumbling also-ran in television, and skillfully maneuvered it to the center of the hottest development ever to hit European media. Dornemann was suddenly being celebrated as the leader of the new TV age in Europe.

OVERREACTING? Now, however, Dornemann's empire is unraveling just as quickly as it came together. Partners Canal Plus and BSkyB now accuse him of betrayal. Executives at both companies say that Dornemann reneged on an agreement to fuse CLT into their digital-TV partnership and that the executive's desire to have it all undermined his own careful plans to dominate European TV. Murdoch has pulled BSkyB from the accord while Canal Plus is considering legal action. Dornemann says his partners are overreacting. The merger with CLT "is no violation of any contract," he says.

But there's no doubt that the dispute is costing Bertelsmann precious time. As Dornemann's allies pull back, his main German rival is extending his lead. On June 11, Leo Kirch, the Munich-based media boss who all along has led the race toward digital TV in Germany, announced pricing for a package of digital channels that debuts in July. Bertelsmann will be lucky to have a product ready by Christmas.

Dornemann's travails stem directly from his hunger to create a TV powerhouse in Europe. The story of how he tried to do just that began last fall. That's when Dornemann learned of partnership talks between the powerful Murdoch and CLT. Murdoch's BSkyB had already created a huge market for satellite pay TV in Britain. A deal with CLT in Europe would give Murdoch an important foothold on the Continent, where he wanted to develop a digital pay-TV network. Moreover, Dornemann suspected BSkyB and CLT were bidding against him to buy broadcasting rights for German big-league soccer. Those rights would provide crucial programming for any CLT-BSkyB venture.

Dornemann quickly concluded the only way to outmaneuver Murdoch would be to buy CLT for Bertelsmann. In early December, at company headquarters in Gutersloh, Bertelsmann's supervisory board gave Dornemann the green light to try. Dornemann made several overtures to Albert Frere, the Belgian financier who controls CLT. Frere, too, was way behind in the race to TV's digital future and was feverishly searching for a partner to put him back in the contest. But according to sources involved in the discussions, Frere wanted to retain control of CLT. Frere himself would not comment.

A THREAT? Talks between Murdoch and Frere had slowed down, too, after their joint bid for soccer rights failed. But Dornemann knew Murdoch would remain a threat. So he came up with another cunning strategy--to turn his potential competitor into an ally. On Feb. 13, Dornemann met Murdoch at BSkyB headquarters to propose a digital-TV alliance on the Continent.

Murdoch jumped at the idea. To round out the group, Dornemann called in his old partner Pierre Lescure, CEO of Canal Plus, the biggest pay-TV company in Europe. Canal Plus had already developed digital-TV technology and launched its own service in France. Murdoch's and Canal Plus's programming savvy, along with Bertelsmann's clout in Germany: It was a dream team. In early March, the three companies announced the digital-TV partnership, called Newco.

Yet the ideal alliance was already in danger. The pact left CLT out in the cold, with no hope of a meaningful presence in digital TV. Frere was livid, and started scheming to put CLT back in the running in digital TV. What better way than to try to lure Dornemann away from his alliance with Lescure and Murdoch? On Mar. 28, he sent Michel Delloye, president of CLT, to meet with Dornemann at Frankfurt airport. After a friendly discussion, Dornemann hopped a plane for another engagement in Buenos Aires.

Shortly after landing, Dornemann got a call from Frere, urging him to return for negotiations. On Mar. 31, Dornemann and Mark Wossner, Bertelsmann's CEO, met Delloye and Frere at Frere's vacation apartment in the Belgian seaside resort of Knokke-Heist. Over several days, the quartet worked out a merger of CLT with UFA, Bertelsmann's Hamburg-based TV business. Frere retained 50% control of the new company and received $1 billion to compensate for CLT's larger contribution of assets.

What Dornemann didn't realize was that his deal with Frere would torpedo his digital-TV alliance with Murdoch and Canal Plus. To understand why, go back to December. At that point, CLT seemed totally up for grabs. Dornemann and Lescure signed an agreement to split control of CLT should either one succeed in buying the company within three months, say sources at Canal Plus and Bertelsmann. The agreement was renewed and extended to include Murdoch when the dream team was formed. Now, however, Dornemann said the arrangement only applied in a buyout--not a 50-50 merger. "It was clearly stated that [if] Frere doesn't want to sell, then none of these ideas [for sharing CLT] will be implemented," says Dornemann.

Murdoch and Lescure began to suspect that they had walked into a trap. Sources close to both executives say they wondered if the Newco agreement was just a decoy, initiated to distract executives at BSkyB and Canal Plus while Bertelsmann pursued CLT before they could bid for CLT themselves. Dornemann says he thought his partners would be glad to have CLT in their camp.

But the sense of violation at Canal Plus grew stronger. On Apr. 14, less than two weeks after the CLT merger, news broke that CLT was entering a French digital-TV alliance with TF 1, one of France's most successful channels. Suddenly, one of Bertelsmann's partners was attacking a key ally, Canal Plus. Lescure read about it in the morning papers. He called Dornemann demanding an explanation. Sources say Dornemann's response was: "I can't control Frere and Delloye."

Furious, Lescure halted work on the German digital-TV venture. Murdoch, who was angry at the slow progress being made in turning Newco into a reality, on June 3 sent Bertelsmann a three-page letter saying he was pulling out of the alliance. Yet Dornemann hoped he might still be able to patch things up. He traveled to Hamburg to host a Newco programming powwow. No one from Canal Plus or BSkyB showed.

Now, Dornemann has to pick up the pieces. He still has a strong broadcasting group with high cash flow, assuming that the CLT deal goes through as planned. But his big bet on digital TV is imperiled. Canal Plus may eventually decide to stay with Bertelsmann, because that is the easiest way to secure a strong German presence. However, Lescure will hammer Dornemann for concessions, and may still force CLT out of its competing French digital partnership.

Dornemann also faces the unsettling prospect that Murdoch will resurface as a competitor. "Germany is still the target," says a source close to Murdoch. Some analysts speculate that Murdoch may try to link up with Kirch, though that's a long shot, given the Bavarian mogul's go-it-alone history. But even Dornemann admits that "anything's possible." Dornemann had control of European television within his grasp. Now he must deal with a punishing setback.

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