Zelnick Looking To Boost BMG’s RCA Label, Pump Up Core Business

Strauss Zelnick is ringing in the new year confident that he can turn around BMG Entertainment’s RCA record label, expand the group’s core businesses and ultimately diversify the company’s entertainment holdings.

But the new North American head of operations would not comment on suggestions from senior sources elsewhere in the company that 1995 is the year that German media giant Bertelsmann’s entertainment group goes public.

“I have not been hired as a director of corporate development to come in and make a major acquisition,” the 38-year-old Zelnick told Variety one day after officially assuming his post as president and CEO of BMG Entertainment North America.

“They don’t need me for that,” he said.

Nonetheless, the BMG Entertainment group, led globally by Michael Dornemann, continues to scour the entertainment world for worthwhile acquisitions, and the presence of Zelnick, a former president of 20th Century Fox and an executive with A-list contacts, is expected to better those efforts.

Zelnick declined to discuss specific deals in his first interview since moving to BMG, but he listed his priorities for the company and outlined a broad strategy.

Variety learned from other sources, though, that BMG’s negotiations over the last two months to take a 25% stake in Savoy Pictures Entertainment for a reported $100 million have broken down. Sources familiar with those talks say that, despite strong mutual interest, BMG’s offer amounted to less than face value and Savoy is not interested in having its stock devalued through a bargain sale.

Last year BMG looked seriously at acquiring New Line Cinema and Castle Rock, but was outbid by Ted Turner in both cases. With Zelnick now in place, industry watchers are retuning their acquisition radar to track the new executive’s moves. But unlike the pricey takeovers of recent memory, notably those involving Paramount and MCA, there is little chance of BMG getting dragged into a messy bidding war.

“I like to make money when I make an acquisition,” Zelnick explained. “There have been a lot of acquisition deals in the last 10 years that have been invitations not to make money.”

Zelnick described his mandate as twofold: First, to organically grow BMG’s core businesses in the record industry, video distribution and music publishing, and then to look for “sensible” acquisitions.

One example he did offer of that consolidated strategy is the company’s growing interactive unit, BMG Interactive Entertainment. Instead of spending large amounts of capital to acquire a big software company, Zelnick explained, BMG used its strength in video distribution to acquire distribution rights to interactive software and games put out by companies like Rocket Science and Crystal Dynamics.

Zelnick, who ran Crystal Dynamics before coming to BMG, mentioned the interactive unit as an example of BMG’s preferred approach of gaining a foothold, rather than purchasing a behemoth. “We’re not spending a billion dollars to acquire an interactive company that does $300 million in revenues – perhaps unrepeatable revenues,” he said.

It is also Zelnick’s goal to extend BMG’s profitable club businesses into new territories, such as Canada, and expand to include interactive titles.

Topping Zelnick’s agenda, however, is the search for an executive to become the new worldwide head of RCA.

Zelnick refused to speculate on the possibility of floating BMG Entertainment on the New York Stock Exchange. But separately, a senior Bertelsmann source told Variety the entertainment group should and will go public sometime in 1995.

Such a move has seemed more likely ever since Bertelsmann rearranged its businesses to represent four distinct product lines: Books, press, entertainment and industry (printing manufacturing). It was this July restructuring that merged the music group and the electronic media together into BMG Entertainment – an entity that could now be independently spun out into a public corporation without exposing the privately held parent company to unwanted outside influence.

It is unlikely, though, that cash-rich Bertelsmann would float the entertainment group to raise capital for an acquisition spree. Some analysts suggest Bertelsmann is heavily under-leveraged and point out that the company’s annual return on its own capital investment far exceeds the interest it would pay on long-term debt. This makes it folly to spend one’s own capital rather than borrowing, or so the argument goes.

Last year, Bertelsmann’s return on assets was typically strong at 13.8% on annual revenues of $11.3 billion. Thus, even if the company were to borrow at a fixed long-term rate of 10%, its consistent annual growth would argue in favor of having several billion dollars in debt.

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