Middelhoff: "We're In The Driver's Seat"

The RTL deal finally puts media giant Bertelsmann on the road to an IPO

Thomas Middelhoff is in a good mood. Grinning, he lifts the centerpiece from his dining table. At first glance it's a fish on a platter, but it turns out to be a plastic bass that lifts its head and sings Take Me to the River. Middelhoff tips back his head and laughs.

The CEO of German media giant Bertelsmann has reason to be jolly. Profits at the $15 billion company rose 45% last year, to $625 million. His latest coup: Bertelsmann's agreement, announced on Feb. 5, to raise its stake in RTL Group to a majority. In a stroke, the deal delivers to Middelhoff two cherished objectives. It puts Bertelsmann on the path to a stock exchange listing for the first time in its 166-year history. And Bertelsmann gets control of Europe's biggest TV company. "We're in the driver's seat now," he says.

Yet the road to an initial public offering will be a long one. To get the majority stake in RTL, Bertelsmann swapped 25% of its own stock for the 30% stake in RTL controlled by Groupe Bruxelles Lambert. GBL has the right to sell its Bertelsmann stake on the stock market after three years, and has signaled it will orchestrate an IPO with Middelhoff.

This is a deadly slow pace by the standards of Bertelsmann's big media rivals in the U.S. Yet Middelhoff plans to use the time to convert to international accounting standards and accustom surprised employees to the idea of answering to bank analysts and fund managers. After all, this is a company that got its start selling Bibles, has long cherished its privacy, and never cared for the preoccupation with quarterly profits that going public will bring.

The question hanging over Middelhoff's latest move is how this affects his plans for reshaping Bertelsmann. Middelhoff wants Bertelsmann to dominate in the digital field--whether through electronic books, peddling music through an alliance with file-sharing pioneer Napster Inc., getting involved in interactive television, or constructing media offerings for the mobile Web. In fact, a big motivation for the RTL deal is the control it gives Bertelsmann over Europe's biggest producer of video content, including live sports and hit series such as the German version of Who Wants to Be a Millionaire. That entertainment treasure chest will be a priceless asset once viewers receive programming on demand over broadband Internet connections.

Middelhoff, though, is still restrained by Bertelsmann's Westphalian conservatism, which often seems to chafe. And he must deal with some serious problems before Bertelsmann shares have a chance of commanding a premium. Despite the impressive surge in profits, core parts of the empire need a revamp. Bertelsmann's German and U.S. book clubs are losing money. Its BMG music group's profit margin of 5% is half that of rivals. A tricky merger between EMI and BMG has yet to be pulled off. The company's stable of magazines, such as Stern in Germany and Fast Company in the U.S., face a slump in ad sales. Even RTL has plenty of work to do. Its stock market value of about $13 billion is less than half that of the smaller British Sky Broadcasting PLC.

Middelhoff may need the three years to get other pieces in place, such as experimenting with different stock-offering techniques on the side. Bertelsmann has already listed some holdings, such as Berlin-based Pixelpark, which helps corporations build a presence on the Web. More are certain to come--sort of stealth stock offerings that won't terrify Bertelsmann insiders too much. One possible candidate for going public is Bertelsmann's music business, assuming the EMI deal takes place: BMG would merge with EMI, which is publicly traded, and enter the world of listed stocks through the back door. And Bertelsmann's 67% stake in publicly listed RTL is worth $9 billion and can now be used as acquisition currency.

One goal will be to firm up control of the company's TV holdings, perhaps by buying out Walt Disney Co.'s 50% stake in Super RTL, a children-oriented German TV station. Former RTL chief Helmut Thoma speculates the TV group could make a bid for Silvio Berlusconi's Mediaset empire if the Italian magnate is elected Prime Minister and needs to sell. "Middelhoff has kept his powder dry for more deals," says Thoma.

In his quest to run a digital Bertelsmann, Middelhoff may have already secured his key victory, by bringing Reinhard Mohn, 79, the company patriarch and honorary chairman of the supervisory board, over to his side. He has backed Middelhoff at crucial moments, as he did in October when Middelhoff first went to Mohn's office to propose that Bertelsmann swap its own shares for those of RTL.

RUTHLESS FEEDBACK. Middelhoff and Chief Financial Officer Siegfried Luther knew they were playing a long shot when they made their pitch. Around Germany, Mohn used to be called "Reinhard the Red" because he preached that the job of a corporation was to contribute to the public good. No one took him for a shareholder-value guy. To the astonishment of Middelhoff and Luther, Mohn said yes to the RTL deal and the IPO.

Mohn, who rarely gives interviews, hasn't explained his conversion to equity culture. But Bertelsmann's holdings in public companies certainly raised his awareness of the stock market. Mohn got a firsthand account of life in the capital markets from his son, Christoph Mohn, CEO of Lycos Europe. It wasn't always a pretty picture: Shares of the Internet portal, part-owned by Bertelsmann, have plunged 86%, to $3.10, since a March, 2000, IPO. But the elder Mohn saw for himself how investors provided ruthless feedback on company performance. The son says he wasn't surprised when the old man decided to back a Bertelsmann IPO: "He has no dogma where everything is written in stone," Christoph Mohn says of his father.

Mohn's agreement signaled that he's still willing to reinvent Bertelsmann. But can his protege Middelhoff keep the winning streak going? Other top German managers are struggling amid a slowing economy. DaimlerChrysler's Jurgen E. Schrempp, for example, is clinging to his job as U.S. car sales slide. When Bertelsmann goes public, shareholders will only be as happy as the next earnings statement. Come to think of it, they'll be an even tougher sell than Reinhard the Red.

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