Bertelsmann sell stake in JV to AOL for $ 8.5 bn

Bertelsmann sell stake in JV to AOL for $ 8.5 bn
AGENCIES

DUESSELDORF, MAR 17: Bertelsmann AG announced Friday the sale of its 50% stake in AOL Europe to America Online Inc. in a deal valued at as much as $8.5 billion. While it has been expected since AOL agreed to acquire Bertelsmann rival Time Warner Inc. earlier this year, the deal marks a strategic shift for the German media giant. Bertelsmann no longer feels it needs to own an Internet service provider and instead is concentrating on commercial agreements to sell its books, magazines, music and movies on leading Internet sites, and on creating its own Web portals.

In a separate transaction, AOL and Bertelsmann have sealed a wide-ranging deal that makes Bertelsmann a "preferred partner" for AOL Europe, which has more than three million subscribers. That means AOL Europe will guarantee prominent access to its subscribers for Bertelsmann products and electronic-commerce services. In exchange, Bertelsmann has agreed to promote AOL in its media products and to try to add one million new subscribers to AOL Europe from its own customers. Taken together, those commercial agreements are valued about $250 million over the next four years, the companies said. Bertelsmann also said AOL will buy out the German company's interest in AOL Australia as part of the deal.

The nature of the deals, though, underscores the close relationship between Bertelsmann Chairman and Chief Executive Officer Thomas Middelhoff and AOL Chief Executive Steve Case. In order not to endanger the AOL-Time Warner merger, for example, Middelhoff agreed to allow AOL to pay for the AOL Europe and AOL Australia stakes in separate tranches over several years. The first payment is not due until Jan. 31, 2002.

The final value of the complex deal will fluctuate between $6.75 billion and $8.5 billion, based in part on a series of put and call options, the people said. Payment will be made in cash, stock or a combination of the two.

Middelhoff earned his stripes at Bertelsmann as a young board member in 1995 when he convinced the reluctant management to buy a 5% stake in a fledgling U.S. online service, AOL, for $50 million. The company's management now says it was the best deal the company ever made, after having cashed in its AOL stock for huge profits.

Bertelsmann is a leading media group with book-publishing activities that include Random House, and music activities that include the labels Arista Records and RCA Records. Its CLT-Ufa SA unit is Europe's largest commercial broadcaster. The company is also building up a powerful stable of e-commerce sites and was among the first global media companies to begin adapting its old-line media business to the Internet.

Because it is not publicly listed, Bertelsmann has limited access to capital markets. So the proceeds from the sale of its stake in the European online venture will be a welcome addition to its war chest as it seeks to expand investments in electronic commerce. The media group is raising cash for further growth this year through a series of initial public offerings of its Internet subsidiaries such as the Web portals Lycos Europe and BOL.com.

The recent merger of Time Warner Music and EMI, however, caught Bertelsmann's music company BMG Entertainment off guard. Middelhoff has vowed to make the company the No. 1 music company in the world, but has yet to make a significant move in that direction.

AOL is still considering an IPO of shares in its European subsidiary, according to people familiar with the situation. But these people say such a move is not imminent. AOL must first strengthen the online service, which is No. 2 in Europe behind T-Online, the ISP owned by telecommunications giant Deutsche Telekom AG. A minority stake in T-Online will be floated next month.

And AOL must also find a partner that gives it access to mobile-phone networks as a new generation of wireless Internet services get off the ground in Europe. Earlir this year, AOL came close to clinching such a deal with Mannesmann AG, a leading German mobile-phone operator. But a deal was scuttled when Mannesmann was taken over by Vodafone AirTouch PLC.