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Bertelsmann Fires CEO in Board Dispute

Media: The battle centered on Thomas Middelhoff's insistence on taking the German firm public, sources say.

July 29, 2002|CHUCK PHILIPS | TIMES STAFF WRITER

German media giant Bertelsmann ousted Chairman and Chief Executive Thomas Middelhoff on Sunday, following a showdown between the 49-year-old executive and the company's supervisory board.

Middelhoff is the latest media baron to lose his job as the world's largest entertainment conglomerates come under increasing shareholder scrutiny. AOL Time Warner Inc. Chief Operating Officer Robert W. Pittman and Vivendi Universal Chief Executive Jean-Marie Messier both resigned under pressure this month.

A simmering, behind-the-scenes battle between Middelhoff and Bertelsmann's largest shareholders, the powerful Mohn family, erupted late last week, prompting his sudden departure. The dispute, sources close to the company said, centered around Middelhoff's insistence on taking the company public.

U.S. executives at Bertelsmann were stunned Sunday morning when they received a faxed statement from the corporation's Guetersloh, Germany, headquarters informing them that Middelhoff was out.

"Thomas Middelhoff will leave the company," the statement said. "The separation resulted from differences of opinion between the chairman and the supervisory board on the future strategy of Bertelsmann AG."

Middelhoff, who sources say was notified of the decision early Sunday, could not be reached for comment. He had more than two years left on his contract and, as late as Friday, sources say, never uttered a word about stepping down.

During his rocky, four-year tenure as Bertelsmann's chairman and CEO, Middelhoff transformed the stodgy, conservative corporation into a flashy media group--the fifth-largest in the world with $20 billion in annual sales.

While Bertelsmann has been hit hard by the advertising slump, analysts note that it is hard to determine the exact financial status of the privately held German group. Unlike other media companies, however, Bertelsmann is believed to be debt-free, with $7 billion in cash for future acquisitions, sources said.

Bertelsmann's holdings include Random House, the world's biggest publishing company; RTL Group, Europe's largest TV operation; and BMG, the New York-based home to such music acts as OutKast, Elvis Presley and Dave Matthews Band.

Joining the company in 1986 as a manager in its Mohndruk division, Middelhoff rose to power during the Internet revolution after persuading Bertelsmann to buy a stake in AOL Europe during the mid-1990s.

Bertelsmann then made a killing by selling its AOL stake for $9 billion before Internet stock prices crashed in 2000.

During his reign, Middelhoff also bought publishing giant Random House and control of television giant RTL--both profitable ventures for Bertelsmann.

But Middelhoff's moves into the music business have been less successful.

Breaking ranks with Bertelsmann's music executives and his four biggest music competitors two years ago, Middelhoff joined forces with Napster Inc. and sank millions of dollars into developing a legal version of the popular file-sharing system, which was declared illegal and shut down by a federal court.

As late as two weeks ago, Middelhoff was championing Napster technology as the solution for distributing music, books and other forms of entertainment in the digital future.

Last year, he failed in his bid to merge BMG with British music giant EMI Group after European regulators nixed the deal on antitrust grounds.

In the meantime, Middelhoff's efforts to clean up Bertelsmann's music division has been slow going, even after he fired the previous management team.

Among other issues, the company will be required later this year to buy Zomba Music Group for $3 billion because of a controversial transaction initiated by former managers.

With the promise of online profits disappearing and stock prices tumbling for media companies such as AOL Time Warner and Vivendi Universal, conservative shareholders at Bertelsmann began to balk at Middelhoff's plan to seek a stock market listing--an integral factor in his long-term strategic vision.

Last year, Bertelsmann opened the way for a public offering by trading 25% of its shares with Belgian investment house Groupe Bruxelles Lambert for a stake giving it control of RTL.

Under the deal, GBL had the right to sell its stake in an initial public offering by 2005.

But with the current market uncertainty, the proposed stock market listing probably will be delayed.

Sources say a few members of Bertelsmann's supervisory board were upset about Middelhoff's plans and persuaded Rheinhard Mohn and his family, the firm's controlling shareholders, to remove Middelhoff from power.

Middelhoff will be replaced by Gunter Thielen, 59, a member of the executive board who had been expected leave the company.

There have been unconfirmed reports in German newspapers that Middelhoff has been offered the top job at Deutsche Telekom.

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