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Bertelsmann's First-Half Profit Rises

Media: Earnings at the German company more than double on sale of AOL Europe stake. The firm plans to focus on its BMG music unit.

September 05, 2002|JEFF LEEDS | TIMES STAFF WRITER

German media conglomerate Bertelsmann reported Tuesday that its first-half profit more than doubled, owing in part to the sale of its remaining stake in AOL Europe, but said it plans to retreat from online ventures and focus on its older businesses.

Bertelsmann, which owns publisher Random House Inc. and record company BMG, said net income for the first six months of the year surged to $1.6 billion, up from $575 million for the period a year earlier. Six-month sales declined to $8.8 billion, down 5% from $9.3 billion a year earlier.

Much of the profit surge came from proceeds of Bertelsmann's sale of shares in online service AOL Europe. Profit would have been higher, but Bertelsmann said it set aside about $1 billion for a possible write-down of its purchase of Zomba Music Group, which distributes music by acts such as Britney Spears and 'N Sync.

Bertelsmann is purchasing the remaining 75% stake in Zomba for about $3 billion as a result of a deal it agreed to a decade ago.

The purchase is by far the most expensive record label acquisition in music history, and analysts say the exorbitant price virtually ensures that Bertelsmann's long-suffering music division, which appeared poised for a turnaround this year, will be swimming in red ink for years.

European regulators, who rejected Bertelsmann's planned merger with rival music company EMI Group last year, signed off on the Zomba deal Monday.

Bertelsmann's financial report came amid an abrupt strategy shift that began five weeks ago with the unexpected ouster of Chief Executive Thomas Middelhoff, who had been leading the privately owned, conservative media giant to invest in emerging technology and undertake a public stock offering.

Gunter Thielen, Middelhoff's replacement, said Tuesday that "after years of dynamic growth and exceptional gains from the Internet sector, Bertelsmann is now in a brief phase of consolidation."

Thielen's management team has swiftly retreated from much of Middelhoff's strategy and reportedly is close to selling BOL.com, its online bookselling unit.

Thielen is expected to put extra pressure on the firm's two worst-performing operations: the BMG music division, home to such acts as the Strokes and Christina Aguilera; and DirectGroup, its direct-marketing arm. Bertelsmann said BMG lost about $44.8 million in the first six months of the year, while the direct-marketing operation lost about $118.5 million.

There are already indications Bertelsmann plans to keep a closer eye on the music division. The company named Thomas Hesse, formerly Bertelsmann's head of corporate strategy, to the newly created post of chief strategic officer for the BMG operation.

"The company is devoting special attention to its music business in view of great uncertainties in the market and radically changing customer needs," Thielen said.

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