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BMG Selling Stake in SonyBMG Music? (August Update: Sold!)

sony bmg saleOver the past couple of years it has been a recurring headline, a come and go promise that’s never been fulfilled.  Now, the news may finally match the rumor.  Multiple reports are suggesting Bertelsmann, the German media giant, is close to selling its 50% stake in the world’s second largest music label (Sony BMG) back to co-owner Sony.

Apart from reports that CFO Thomas Rabe has made several trips to New York to meet with his Sony America counterpart, details are almost entirely absent.   Sources with inside information, however, have disclosed to several press outlets that talks are advanced and in late stages. Germany’s FT Deutschland paper says the asking price is about $1.5b but could drop to $1.2 or $1.3b.  The deal will also have to include some form of extension to a services agreement that allows Bertelsmann services company Arvato to handle production, packaging and distribution of CD’s and products well beyond the existing contracts 2009 expiration. 

While, there is always a healthy level of skepticism that goes with news citing “inside sources,” the prospect of the sale seems more likely now than ever.  

In 2007, net income at Bertelsmann fell more than 80 percent to €405 million, or $640.4 million.  Chief financial officer Thomas Rabe attributed that shortcoming to significant declines in CD sales and in book club memberships. Those, coupled with the weak dollar, led to €414 million in write-downs.

Bertlesmann Chairman and CEO Hartmut Ostrowski has set ambitious targets for the company that include generating a more than 50% increase in revenues by 2015.   Over the same period, operating profit is expected to rise to over €3 billion as well. Part of the strategy to achieve this growth and hit those targets is to channel future investments into growth areas.  Ostrowski has also made no secret of his desire to clean up the company’s asset portfolio even turning to divestiture if needed.

Already, in March, the Direct Group division which is accountable for the book club write downs was put up on the block.  Both Rabe and Peter Olsson, head of Direct Group North America have confirmed that Morgan Stanley is helping them sell the division.  “We have initiated the sales process," said Olsson.

Music remains the other underperforming division and it’s reasonable, especially given state of the entire music industry (declining revenues) that it could get the same treatment.

If the deal happens, however, I won’t mark an end to Bertelsmann’s media business.  Ostrowski told the New York Times on June 2nd , “there is no doubt we will continue to build our media business.  We are and will continue to be a media company.” 

The catch is, Bertelsmann will focus on adjusting their assets to higher yield holdings.  That includes the prospect of pushing a higher profile (and asset weight) for the company’s less sexy, but increasingly successful Arvato services business group.   In total, nearly a quarter of Bertelsmann’s revenue comes from the division already.

As one of the 6 operating groups, Aravato runs printing plants in the US and Europe. They run call centers for a number of major companies. They handle Google’s ad billing.  Arvato is also one of the world’s largest outsourced customer relationship management services providers, with operations in nearly 20 countries.  Other operations include CD and DVD replication and systems integration.  With divestitures Arvato could account for as much as 40 to 50 percent of sales. 

[Further evidence of Arvato’s increasing stature can be found in executives being promoted out of that division.  Ostrowski himself, the CEO, got his start there and headed the group before being promoted to CEO and Chairman.   Then there is Gunter Thielen, chairman of the company’s supervisory board and an Arvato alumnus.  There is also Markus Dohle.  Just a few weeks ago he was promoted from the printing operation to become CEO of Random House, the largest book publisher in the world and another staple in the Bertelsmann portfolio.]

Bertlesmann is composed of six corporate divisions. RTL Group is Europe’s largest broadcaster.  Gruner & Jahr is the largest magazine publisher in the region.    The Bertelsmann Music Group represents the 50 percent interest in Sony BMG.  Random House is the world’s largest trade book publisher.   Direct Group handles music and book clubs.   Lastly, Arvato, handles media and communication services.   By year end, if the stories this time pan out, Bertelsmann could be down to four.


UPDATE AUG 5, 2008: The rumor is now fact. Sony has agreed to acquire Bertelsmann’s 50% stake in Sony BMG for $1.2billion. The music company will be renamed Sony Music Entertainment Inc. (SMEI) and be a wholly owned subsidiary of Sony Corporation of America. Regulatory approval will be required. (Press Release Here)

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