Bertelsmann faces investor test over RTL deal

Bertrand Benoit in Frankfurt and Ashling O'Connor in London

Financial Times, January 13 2002

A row between Bertelsmann and some institutional investors in RTL, the TV broadcaster it wants to take private, has turned into a test for Bertelsmann which is preparing to transform itself from a private media group into a public company.
An association of small minority RTL shareholders, led by Luxembourg-based BGL Investment Partners (BIP), Audiolux and Investas, is pressing for equal treatment in the buy-out of Europe's biggest free-to-air broadcaster.
Media investors should watch with attention, say Bertelsmann's detractors, as the case will offer a glimpse of how the privately-owned group is likely to treat minority shareholders when it floats on the stock exchange in 2004 or 2005.
Minority shareholders are to be offered E44 a share for their collective holding, representing 11 per cent of the enlarged share capital. That is the price at which Pearson, the media group which owns the Financial Times, agreed to sell its 22 per cent stake last month.
Minority shareholders say the price is "unacceptable" given that Bertelsmann, led by Thomas Middelhoff, once put an implied value on their shares ranging between E120 and E200 when it bought the 30 per cent stake owned by Albert Frère's Groupe Bruxelles Lambert in February last year.
They also cite the fact that RTL had secured authorisation from its shareholders in June 2000 to buy back up to 10 per cent of its equity at a minimum of E60 per share for a period of 18 months.
"That clearly shows what the company thought to be the absolute minimum value of its shares," says one London-based institutional investor. He added that Pearson, owner of the Financial Times, may have been forced to sell at a lower price because It was anxious to repay debt.
"This behaviour by Bertelsmann is a blow to confidence for investors," says François Tesch, chairman of Audiolux.
The concerns of RTL's minority shareholders echo those expressed when Kirch Gruppe, another large German private media group, announced plans to merge KirchMedia its free-TV and rights arm, into ProSiebenSAT.1, its 52 per cent-owned listed broadcasting subsidiary, last year.
Some analysts feared the merger, to be completed in June, would be damaging to ProSieben's minority shareholders depending on how much of Kirch's E6bn of debt they would be asked to shoulder and how KirchMedia would be valued.
But RTL's minority shareholders could find it hard to make a compelling case for Bertelsmann to raise its offer. "I do not think the minority shareholders have much of a case," says Nick Bell, media analyst at Bear Sterns.
The relevance of the GBL deal looks legally shaky. Under Luxembourg corporate and Belgian stock exchange laws, Bertelsmann was not required to extend the terms of the GBL deal to other shareholders. Neither would it have to under UK law since RTL's listing prospectus in the UK stated GBL and Bertelsmann were acting as a concert party.
Bertelsmann, which insists it will not make a better offer, says the E44 was the result of a careful valuation of RTL. And it points out that Pearson, has already accepted the offer.
The price is also 8 per cent above RTL's closing share price on the day preceding the announcement, 22 per cent above the average of the past three months, and well over its all-time low of E26. It is also exceeds several medium-term broker forecasts.
More practically, some observers think the additional costs to Bertelsmann of raising its offer would outweigh the benefits of taking RTL private.
If it did, it would need to top up the E1.5bn being paid to Pearson next month. Each additional euro per share equates to a pay-out of a further E51m, according to Bear Sterns.
There are even questions about how serious Bertelsmann is about mopping up RTL's residual free float. One person close to RTL, but unrelated to Pearson, says the public tender offer was Pearson's idea and a condition for it to sell its 22 per cent stake.
"We do not buy the argument that Bertelsmann will be generous to minority shareholders to keep them sweet ahead of its own IPO," says Bear Sterns. "It can argue that E44 is a generous price."
Bertelsmann is planning to put its offer to the RTL board next month. The directors, being advised by UBS Warburg, will need to consider whether rejecting it may ultimately destroy the value of shareholders' holdings, rather than improve it.
"It's a classic case of the prisoner's dilemma," said Mr Bell. "If you do not take the offer, you risk other people accepting it, leaving you with an illiquid stock you can only sell to the controlling shareholder."