BUSINESSWEEK ONLINE : APRIL 24, 2000 ISSUE
INTERNATIONAL BUSINESS A Euro Media Star Is Born The union of Frere, Bertelsmann, and Pearson creates Europe's top player What do you do with a modest television business in an era when size matters most? For Marjorie Scardino, the choice was stark: Sell the TV division of British media giant Pearson PLC (PRSNY) or merge it with a larger group. So on Apr. 7, Pearson's energetic CEO made her move. By joining Pearson TV with the broadcast interests of Germany's Bertelsmann and Belgian tycoon Albert Frere, Scardino has helped create Europe's No. 1 broadcaster in terms of revenues and spread. The new company, Scardino boasted, ''is going to be a real powerhouse.'' Could be. The still-to-be-named venture is the most ambitious attempt yet to create a truly European media platform that can stand up to the U.S. giants. Now, Europe has a big media group--combined revenues will be $3.6 billion--that can sell itself to the likes of Hollywood and the European soccer hierarchy as the platform of choice to reach the whole Continent. There's a New Economy twist, too: The group can provide content for hungry Internet companies. This is a venture whose heft and promise will force rivals to react. The idea is to combine Pearson's proven talent for lowbrow production--game shows, soaps, and sitdrams such as Baywatch--with a vast distribution network. Luxembourg-based CLT-UFA, which is jointly owned by Bertelsmann and Frere, controls 22 television and 18 radio stations, including Germany's top-rated RTL. With Pearson TV on board, the new company also gains control of Britain's Channel 5. LOW RISK. Getting this multicultural institution to run smoothly won't be easy. Some analysts would like to see a tougher manager than Didier Bellens, a Frere associate who is CEO at CLT-UFA and designated CEO at the new company. Margins at CLT-UFA, where the Frere and Bertelsmann teams have until recently preserved separate fiefdoms, run about 11%, compared with almost 21% at Pearson TV under the demanding Scardino. But a source close to the deal says Bellens has the needed consensus-building skills--and that he can be dumped if he doesn't deliver. Nobody's complaining about profit problems, in any case. Scardino, Frere, and Bertelsmann CEO Thomas Middelhoff have certainly found a way of staying in the costly broadcasting game without taking on too much financial risk, and that is storyline enough for the markets. Shares of Frere's Brussels-listed Audiofina, the holding company for the merged interests, are up 27% since the deal was disclosed, to about $150 on Apr. 11. That values the company at roughly $25 billion. If the market's blessing lasts, the new company and its parents will have considerable firepower to invest in programming and acquisitions. The astronomical stock prices of telecom and Net companies have let them use shares as currency in buying new properties. In early April, for instance, Spain's Telefonica shelled out $5.4 billion in stock for Endemol, a hot Dutch TV programmer. The new Pearson-Bertelsmann group plans a London listing. Having a vehicle that can use shares to make acquisitions is particularly important for privately held Bertelsmann, which will hold 37% of the stock in the new company. Middelhoff says that the partners--Frere will hold 30% of the company, Pearson 22%, and the public 11%--have their eye on U.S. programmers and will talk to Canal Plus about sports-rights deals. Meanwhile, the value of the venture's programming assets is growing. As the Endemol deal underscores, media companies have one advantage that's hard--and expensive--to beat: They have content, not just the networks to put it through. That's why the market is valuing Pearson's 22% of the venture at more than $5 billion. That doubles estimates of Pearson TV's worth before the deal, according to analyst Steve Winram at Morgan Stanley Dean Witter in London. ''In the long term, content will be decisive,'' says Wolfgang Bock, a partner at Mercer Management Consulting in Munich. ''The company that can entertain customers will win.'' That means entertaining customers on the Net as well. Europe's boom in so-called broadband is creating a huge demand for programming. Cable companies, the telecoms, and broadcasters such as Rupert Murdoch's British Sky Broadcasting Group PLC (BSY) and Granada Group PLC are spending heavily to expand transmission capacity. As digital technology spreads, many new channels and programs will be interactive, enabling viewers to order goods or services on TV or on mobile-phone displays. Old media companies are also adapting program libraries to the new media. Vivendi, which owns 49% of Canal Plus, is working with Vodafone AirTouch PLC (VOD) to develop mobile Internet offerings that are likely to draw upon Canal Plus programming. And Pearson TV's CEO, Richard Eyre, who will head up programming at the new company, talks of adapting The Price is Right to an Internet home-shopping format. Pearson is adept at altering such products for new formats and cultures: Its existing joint venture with CLT-UFA is already Germany's top soap-opera producer. Rival European media executives aren't exactly sitting back to enjoy the show. ''This creates a lot of anxiety among the media players,'' says Riccardo Pavoncelli, head of European media at Morgan Stanley in London. ''Inaction is heavily penalized in the markets.'' Indeed, Pearson's deal puts pressure on British regulators to approve the proposed $14 billion merger of broadcasters Carlton Communications PLC and United News & Media PLC. Granada has asked the authorities if it can bid for one of the others. Elsewhere, Rupert Murdoch, who has watched dot-com shares shoot by his News Corp. stock, is trying to assemble a global satellite platform that he would take public. Vivendi is in talks to trade its 24.5% piece of BSkyB for a stake in this venture. EGO HURDLE. The Pearson/Bertelsmann move may also jar Germany's top pay-TV operator, KirchGruppe, and Silvio Berlusconi's Mediaset in Italy, into action. A matching deal involving Murdoch interests, Kirch, and Mediaset is conceivable. But it will be tricky to find a formula that would satisfy egos, bridge cultural differences, and pass regulatory scrutiny. Meanwhile, the telecoms or the Internet sector could beat the old media companies to the industry's next big deal. Deutsche Telekom (DT), says Bock, may well be shopping for content for its Internet service provider T-Online. Telefonica is still on the prowl. Scardino and her allies are unfazed. At her Apr. 7 press conference, she joked that the new venture itself might bid for a telecom company. Given the monster market caps of a British Telecommunications PLC (BTY) or a Telefonica, that's unlikely. But whoever does the acquiring, Europe's new media age looks to be a nifty prospect for shareholders. By Stanley Reed in London, with Carol Matlack in Paris, Katharine A. Schmidt in Stuttgart, and Kate Carlisle in Rome _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS A Euro Media Star Is Born TABLE: Europe's Broadcasting Powerhouses INTERACT E-Mail to Business Week Online

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