Bertelsmann AG Financial Analysis Report
Bertelsmann AG was founded in July 1835 by Carl Bertelsmann as a print shop. Initially the company concentrated on Christian books and songs. In 1849 Carl Bertelsmann’s son Heinrich took over the publishing business, which employed 14, and extended the inventory of the publishing house to novels. At the time of his death in 1887, the staff had grown to 60.
Next to head the company was Johannes Mohn, son-in-law of Heinrich. The company’s growth slowed during this period and the focus was redirected to theological subjects. In 1910 he introduced paid vacation to the company. By 1921, when he turned control of the company over to his son Heinrich, the company had grown to 85 people.
Under the leadership of Heinrich Bertelsmann, the company experienced rapid growth and by 1939, the publishing house had grown to employ 400 people. New marketing channels were added as the readership became more mainstream in the late 1920’s. On the verge of World War II, the company moved from classical literature and fiction to include books with militaristic themes and eventually published books with nationalistic, racial and anti-Semitic content. The publisher insured its survival for most of the war by linking itself with the Nationalist Socialist ideology. Trouble started in 1944 when it was shut down by the German government as non-essential to the war effort and then crippled in March 1945 during an allied air raid on Gutersloh, in which only some of the printing machines survived.
After the war, the publisher was rebuilt by the fifth generation to lead Bertelsmann, Reinhart Hohn, whose influence continues to the present. He took the company from a medium-size printing company to a media conglomerate. In 1950 he established the Reader’s Circle, which bypassed the traditional marketing channels and allowed books to go directly to the reader. Within a year, it had 100,000 members and by 1954 membership had reached 1,000,000. The LP label Ariola Records was founded in 1958 which signaled the company’s entry into the music market. Bertelsmann entered the film industry with the purchase of Ufa Filmproduktionsgesellschaft in 1964. Mohn’s transition of the company culminated in 1971 with incorporation. He remained CEO and was the majority shareholder.
The 1980’s and 1990’s saw an emphasis on foreign markets, which had begun in 1962 with Spain. In the United States, Arista Records (1979), Bantam Books (1980), Doubleday (1986), RCA (1986) and Windham Hill Records (1992) joined the Bertelsmann family. In the 1990’s the company went digital with the establishment of AOL Europe and the network company mediaWays, Europe’s second largest network provider, and in 1999 launched BOL, an international media shop. In 1998 Thomas Middelhoff became CEO and acquired Random House and concentrated book publishing in the United States under this label.
The year 2000 saw the creation of the RTL Group, which was taken public. It was the result of a merger between CLT-UFA and the British company Pearson TV. In 2002 Bertelsmann acquired Zomba, the world’s largest independent music company. This move, along with the addition of superstars like the Backstreet Boys and Britney Spears to its stable, pushed the BMG division into third place worldwide in music publishing. In August 2004, a 50/50 merger was completed with Sony Music Entertainment to create Sony BMG Music Entertainment. Among the labels included are: Arista, Columbia Records, Epic, Jive, J Records, LaFace, RCA Records, RLG-Nashville, Sony Music Nashville, Sony Classical, BMG UK, BMG Japan, BMG Ricordi and Sony Music International.
Financial Condition of Company
Currently Bertelsmann is a non-public stock corporation. Its capital shareholders are Bertelsmann Stiftung (57.6%), Groupe Bruxelles Lambert (25.1%) and the Mohn family (17.3%). Bertelsmann Verwaltungsgesellschaft controls 75% of the voting rights, representing the Mohn family and Bertelsmann Stiftung. The remaining 25% of the voting rights are controlled by Groupe Bruxelles Lambert. The current CEO and CFO are Gunter Thielen and Siegfried Luther respectively, and the company employed over 76,000 people worldwide by the end of 2004. On March 17, 2005, Bertelsmann announced earnings of $1.28 billion on revenues of $21.17 billion.
The largest division within Bertelsmann is the RTG Group. It accounted for about 28% of total revenue in 2004, and is comprised of television (RTL II, SUPER RTL, VOX, n-tv, M6, Five, RTL 4, Yorin and RTL TV1), radio (Bel RTL, Yorin FM, RTL, RTL 2, Fun Radio, 104.6 RTL, and Radio Hamburg) and production (FremantleMedia, SPORTFIVE, teamWorx and UFA Film ; TV Productions). These holdings are primarily European. It is one of the slowest growing divisions, showing an increase in revenue for 2004 of only 0.8%.
The smallest division in terms of revenue in 2004 was Random House. It is made up of Ballantine (Ballantine Books, Ballantine Reader’s Circle, Del Rey, Del Rey/LucasBooks, Fawcett, Ivy, One World and Wellspring), Bantam Dell Publishing Group (Bantam Hardcover, Bantam Mass Market, Bantam Trade Paperbacks, Crimeline, Delacorte Press, Dell, Delta, Domain, DTP, Fanfare, Island, Spectra and the Dial Press), Crown Publishing Group (Bell Tower, Clarkson Potter, Crown Business, Crown Publishers Inc., Harmony Books, Prima, Shaye Areheart Books, and Three Rivers Press), Doubleday Broadway Publishing Group (Broadway Books, Currency, Doubleday, Doubleday Image, Doubleday Religious Publishing, Main Street Books, Nan A. Talese and Harlem Moon), Knopf Publishing Group (Alfred A. Knopf, Anchor, Everyman’s Library, Pantheon Books, Schocken Books and Vintage), Random House Audio Publishing Group (Villard Books, the Modern Library, RH Trade Paperbacks and Striver’s Row Books), Random House Children’s Books (Dell/Delacorte/Dell Young Reader’s Group, Alfred A. Knopf, Bantam, Crown, David Fickling Books, Delacorte Press, Dell Dragonfly, Dell Laurel-Leaf, Dell Yearling Books, Doubleday, and Wendy Lamb Books), Random House Diversified Publishing Group (RH Value Publishing), Random House Information Group (Fodor’s Travel Publications, Living Language, Prima Games, Princeton Review, RH Espanol, RH Puzzles and Games, and RH Reference Publishing) and Waterbrook Press (Shaw Books and Fisherman Bible Study Guides). It accounted for about 10% of revenues, but was second in terms of growth at 2.8%. To Americans, this division is the most well-known of the Bertelsmann holdings. Interestingly, one of the major factors in the profitability of this division is the popularity of a novel by Dan Brown, “The Da Vinci Code”. It is the best selling novel in company history.
Short Term Liquidity
Capital Structure ; Long Term Solvency
Net Worth to Total Debt.74.61.54
Net Worth to Long Term Debt1.871.631.35
Net Worth to Total Assets.42.38.35
Return on Investment
Return on Total Assets5.9%1.0%4.2%
Return on Equity Capital15.8%2.7%12.5%
Operating Performance Ratios
Gross Margin Ratio61.9%62.5%61.8%
Operating Profits to Sales10.3%8.1%7.1%
Net Income to Sales7.2%1.2%5.3%
Asset Utilization Ratios
Sales to Cash8.1310.2318.74
Sales to Accounts Receivables6.025.525.63
Sales to Working Capital3.023.202.91
Sales to Total Assets.81.83.83
Current Ratio – measures the ability of the business to meet the maturing claims of creditors plus the current operating costs, and has a direct impact on the amount of short-term credit that may be granted.
Acid Test – also called the quick ratio, it is a test of immediate solvency, and represents funds that may be made readily available for paying current obligations.
Net Worth to Total Debt – measures relative amounts of resources provided by owners and creditors and reflects strengths and weaknesses in basic financing of operations.
Net Worth to Long Term Debt – is similar to Net Worth to Total Debt ratio, but is a measure of the use of long term debt in financing operations.
Net Worth to Total Assets – measures the proportion of assets provided by owners and reflects financial strength and cushion for creditors.
Return on Total Assets – measures the efficiency of all resources in providing a return to investors and allows the analyst to compare it to alternative uses of capital as well as to the return realized by enterprises subject to similar degrees of risk.
Return on Equity Capital – measures the efficiency of owner’s equity, exclusive of debt, in providing a return to investors and allows the analyst to compare it to alternative uses of equity as well as to the return realized by enterprises subject to similar degrees of risk.
Gross Margin Ratio – indicates the net profitability of each dollar of sales and has primary value in the evaluation of trends and comparison with industry and competitor statistics.
Operating Profits to Sales – measures the relationship between the earnings before interest and taxes, and sales, and is a further refinement of the Gross Margin Ratio.
Net Income to Sales – measures the percentage of total revenue brought down to net income. It is useful as an index of profitability, and represents the main component of the return on investment.
Sales to Cash – measures the relationship of sales and the cash level. Too high a rate of turnover of cash may be due to a cash shortage. Too low a rate of turnover may be due to holding idle and unnecessary cash balances. It is the tradeoff between liquidity and tying up funds which may yield little or no return.
Sales to Accounts Receivables – measures the credit extension policies of an organization. A low rate of turnover may be due to an overextension of credit, an inability of customers to pay, or a poor collection job. A high rate of turnover may indicate too strict credit policies or an inability to extend credit. It is the tradeoff between sales and tying up funds in receivables.
Sales to Working Capital – measures the relationship between sales and the working capital of a business. Too high a ratio may indicate an insufficient amount of working capital. Too low a ratio may indicate unproductive assets.
Sales to Total Assets – measures the ability of a business to use assets productively. This ratio may be indicating conditions of excess capacity, inefficient or obsolete equipment, or temporary changes inn demand.
Bertelsmann appears to be healthy in terms of short term liquidity. The Acid Test Ratio is normal for companies of this size and the Current Ratio is higher than normal and indicates that the company should have no trouble meeting short term financial commitments. The capital structure ratios also appear to indicate that the company is able to finance operations, but does not have too large exposure in terms of debt. The Return on Assets and Return on Investment are also strong, although there was a downturn in 2003. This was most likely due to higher interest expenses and a charge for amortization of goodwill.
The Gross Margin appears extremely high, but this is due to the nature of the business. Bertelsmann does not have a large cost of goods sold. Because it is partially a service business, a large part of operating expenses are personnel costs. Operating Profits to Sales and Net Income to Sales Ratios are within norms, although the increased expenses in 2003 are reflected by the 1.2% Net Income to Sales Ratio. The Sales to Cash Ratio indicates that Bertelsmann may be holding an excess amount of cash, providing little or no return. The other asset utilization ratios are within industry norms, further highlighting the large amount of cash on hand.
Other Factors in Assessment of Company’s Health
Bertelsmann is a complete media company encompassing books, newspapers, magazines, music, television, movies and radio. It is well known for its music labels, such as Arista and Columbia, and the publishing houses, Random House, Dell, Doubleday and Ballatine. Less well known to Americans are the television and radio networks and the extensive list of newspapers and magazines in Europe, but they are a core part of the business. It also includes some holdings which seem unusual, such as Dynamic Graphic Finishing, which provides foil stamping, embossing, die-cutting, and related graphic arts services. Another holding somewhat out of the mainstream of the media business is the investment in Arvato Mobile, a European cell phone provider. Arvato Services has also purchased the majority of shares in Phone Assistance, a Moroccan Call Center Services provider with operations in Morocco, India, Poland, Ireland and Turkey.
Probably the most significant recent development within Bertelsmann has been the 2004 merger of BMG with Sony Music Entertainment. This venture includes some of the most important labels in the music business and has a stable of many of today’s most prominent artists. It also includes an archive of works from such artists as Miles Davis, The Byrds, John Denver, Johnny Cash, Robert Johnson, Janis Joplin, Barry Manilow, Louis Armstrong, Dolly Parton, Elvis Presley, Mahalia Jackson, Vladimir Horowitz, Glenn Gould, Laura Nyro, Lou Reed and Stevie Ray Vaughan. While initial results seem to be very positive, at least in terms of revenue and awards, the long-term outlook for this merger is uncertain.
A very recent occurrence that may cloud the future of the division was reported recently by the Associated Press. On April 1, 2005, music agent James Walker filed suit against Sony BMG alleging that they tricked gospel music artists into firing their agents in order to reduce costs and maintain control over these artists. The suit could cost Sony BMG millions of dollars should there be an unfavorable court decision. Although this amount would not be material to the overall financial position of the company, it could have adverse results due to negative publicity. Gospel music is one of the fastest-growing segments of the music industry.
Key Management Initiative
During the press conference on March 17, 2005, Bertelsmann announced GAIN, which stands for growth and innovation initiative. This initiative is centered on expansion of market position through innovation around the core businesses, for example Avrato Direct Services UK, RTL TV Germany and Gruner + Jahr France. Bertelsmann will also engage in regional expansion by entering high-growth markets in Eastern Europe and Asia through RTL in Croatia, Random House in Korea and Direct Group in the Ukraine. This will be coupled with the strengthening of core businesses, by increasing profitability in Sony BMG, strengthening the market position in the Gravure printing plants through combination, and acquisition of the majority stake in Motor-Presse Stutgart. The Sales to Asset Ratio of the Gruner + Jahr group is very high, at 1.90 (corporate is .81) which could indicate that demand is very strong. Sales to Asset Ratio of Random House is close to the corporate ratio at 1.02. The parent company also has a strong cash position, so operations in this division will have solid financial backing. Whether these efforts will be successful cannot be determined at this time, but Bertelsmann has a rich history and culture upon which to build.
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