Punk Rocker Juggling Billions in Bertelsmann Growth Hunt
Thomas Rabe speaks five languages, holds a doctorate in economics, and cycles, runs or rows more than 60 miles a week. In his 20s, he managed hundreds of millions of deutsche marks in East German assets after the Berlin Wall fell. In his 30s he oversaw the finances of Europe’s largest TV broadcaster. As he approaches age 50, Rabe works in an office next to his boss and lives in a house next to his boss’s mother.
Rabe’s boss’s mother is Liz Mohn, matriarch of the family that runs Bertelsmann SE, a sprawling media conglomerate with interests from television and music to magazines and printing. As Bertelsmann’s chief executive officer, Rabe works for Mohn’s son Christoph, the head of the company’s supervisory board.
While other media CEOs spend much of their time searching for the next big purchase, any dealmaking ambitions Rabe harbors are constrained by Bertelsmann’s ownership structure. The Mohns, descendants of the company’s founder, control 19.1 percent of Bertelsmann, and foundations led by the family hold the rest. They are less focused on building a global empire than on safeguarding their fortune; Liz Mohn’s net worth is estimated at $5.5 billion by the Bloomberg Billionaires Index.
The family “wants us to invest as wisely as possible with a very long-term view,” Rabe said over the ginger tea he typically sips throughout the day. “Putting all the eggs in one basket is not good.”
Outsiders say that strategy has led to lackluster growth. While Bertelsmann has steered clear of reckless spending, it has held on to lagging units and been slow to expand into dynamic new markets, falling behind media peers such as Walt Disney Co. and Comcast Corp., said Alex DeGroote, a media analyst at Panmure Gordon in London.
Revenue rose 1.8 percent last year, to 16.4 billion euros ($23 billion) -- below what it was a decade ago. Deals such as the full takeover of music-rights unit BMG and the purchase of e-commerce service provider Netrada helped boost revenue 8.5 percent in the three months through March, the company reported today.
Bertelsmann remains heavily anchored in traditional media like books and magazines and relies on its RTL television unit, Europe’s largest broadcaster, for 61 percent of operating profit. Sales, though, fell last year at RTL, Bertelsmann’s Gruner + Jahr magazine business, and its printing unit.
“The challenge is growth,” DeGroote said. “Music, book publishing, and magazines aren’t growing.”
Rabe acknowledges Bertelsmann isn’t expanding as fast as he’d like, but he says that with mid-sized acquisitions he can reach sales of 20 billion euros by around 2018 and boost revenue by about 1 billion euros annually after that.
The Luxembourg native and bass player -- he cut two albums in the 1980s with a punk band called “White Lie” -- insists he has plenty of latitude for decision-making in spite of the family’s oversight. Since he took over as CEO in 2012, Rabe has steered Bertelsmann on a new course, and the company’s pace has quickened under his leadership, said Guillaume de Posch, co-CEO of RTL.
“It will take us five minutes to explain to him the case and to reach a conclusion,” de Posch said in a phone interview today. “It’s very fast decision-making.”
Rabe has revamped almost his entire leadership team, closed a printing facility with more than 1,000 employees, and shut the prestigious Financial Times Deutschland newspaper -- measures that had historically been off-limits for managers at the paternalistic company.
Rabe describes his role as building consensus between management and the Mohns, who in January 2013 tightened their grip on the company by appointing Christoph as chairman, the first family member to head Bertelsmann in two decades.
“I come up with a plan and take it to the family,” Rabe said in his office at the Alte Kommandantur, a reconstructed Baroque palace where he works when he’s in Berlin. “The environment is relaxed.”
Rabe says that with Bertelsmann debt at an eight-year low and 3 billion euros for investments, he has the resources he needs for acquisitions in education, digital, and markets outside Europe, which accounts for about 80 percent of sales. And he says the company can boost growth with businesses such as BMG -- which oversees rights to songs from artists including the Rolling Stones, Johnny Cash, and Nirvana -- and FremantleMedia, a TV production house that owns the show formats for programs such as “American Idol” and “XFactor.”
One idea that’s not on the table: an initial public offering. Thomas Middelhoff, CEO from 1998 to 2002, had urged the Mohns to float shares, and Rabe two years ago suggested that strategy. A few months later, the Mohns nixed the idea out of concern that the proceeds wouldn’t compensate for their loss of control.
“To take Bertelsmann public is virtually impossible,” Rabe said, as analysts would never understand the mixed bag of businesses.
As an alternative, he says, the company can sell stakes in individual units. A year ago, Bertelsmann sold 17 percent of RTL for 1.4 billion euros, to cut debt and raise money for digital and international expansion. Rabe notes, though, that the Mohns want to own at least 70 percent of their companies, and usually far more.
Caution has deep roots at Bertelsmann. The company is headquartered in Guetersloh, a town of 96,000 about three hours west of Berlin by train. It was founded in 1835 by Carl Bertelsmann as a publisher of Christian books. By the 1920s, the company had become a regional publishing house, and in the 1930s and ’40s it was one of the biggest producers of Nazi propaganda. In 1998, the company issued an apology and an independent report that detailed its wartime activities and how it had profited from Jewish slave labor.
After the war, Reinhard Mohn, a great-great-grandson of the founder, took over. As an officer in German Field Marshall Erwin Rommel’s Afrika-Korps, Mohn was captured by the U.S. Army and transferred to a prison camp in Kansas, where he learned English. In 1950, in a bid to diversify away from Bertelsmann’s religious roots, Mohn founded the “Lesering,” a book club in which customers committed to buy multiple titles annually at a discount. In war-ravaged Germany, the idea took off, and four years later the club had 1 million members.
Surging revenue from the book club gave the company ample cash to expand. In 1958, Bertelsmann founded Ariola Records and started selling its albums via the club model. In 1969, it bought into Gruner + Jahr. By the 1980s, Bertelsmann had purchased Bantam Books, Doubleday and the RCA Victor record label and was the world’s largest media company -- a title Rabe doesn’t much care for today.
“Honestly, size is irrelevant,” Rabe said. “We don’t have to be the biggest if we capitalize on high-growth business.”
The Mohn family’s lingering distrust of outsiders’ ambitions has spurred them to keep management on a tight rein, even if it meant slower growth. After the dot-com bubble in the early 2000s, Reinhard Mohn blamed the ensuing economic crisis on hired executives who disregard the interests of their companies. In an interview with the Welt am Sonntag newspaper, he said “it’s dangerous to have a manager who secretly gives precedence to his personal aims.” Christoph and Liz Mohn -- the widow of Reinhard, who died in 2009 -- declined to comment for this article.
To meet Rabe’s growth target, Bertelsmann is focusing on acquisitions of about 500 million euros rather than blockbuster deals such as Vivendi SA (VIV)’s purchase of Vodafone’s stake in SFR for 8 billion euros in 2011, Disney’s $4 billion buyout of LucasArts Entertainment Co. in 2012 or News Corp.’s 7.8 billion-pound bid for British Sky Broadcasting Group Plc (BSY), which was halted after the company’s phone-hacking scandal in the U.K.
For Bertelsmann “to transform growth, the acquisitions pot needs to be bigger,” said Ian Whittaker, a media analyst at Liberum Capital Ltd. in London.
The most noteworthy Bertelsmann deal in recent years didn’t involve money, but rather a share swap announced in 2012 to merge Pearson Plc (PSON)’s Penguin books unit with Bertelsmann’s Random House. Today, Bertelsmann owns 53 percent of the combined publisher -- an exception to the Mohns’ usual target of 70 percent ownership; Bertelsmann says they still have full control, which is sufficient in this case. While the merged company is now the world’s largest book publisher, its profits over the past two years have been largely dependent on the success of the “Fifty Shades of Grey” series.
Rabe, who speaks fluent English, French, German, Dutch and Spanish, splits his time between Berlin and a house in Guetersloh that’s directly next door to the home of Liz Mohn. Before becoming Bertelsmann’s chief financial officer in 2006, he served as CFO at RTL.
Despite his 14 years at the company, press reports abound with items foretelling Rabe’s departure, including speculation his contract won’t be renewed, the family doesn’t like him, or he’s leaving for another job. Late last year, he says, Vivendi asked if he’d be interested in taking over that company, but he said he wasn’t available and never got a formal offer.
“This created difficulties for me and the family,” Rabe said. “I should have told them I was approached.”
Rabe says he’s committed to Bertelsmann and helping it push into digital and expand outside Europe. He chalks up the press speculation to disgruntled employees, or “people we are hurting in the transformation of the company.” In the two years he’s been CEO, Rabe notes, he has replaced managers across the company, including most of the executive board.
“In these situations you make friends but also make enemies,” he said. “But where we are taking the company now is correct and we were too slow to react. It should have been done much, much earlier.”