Bertelsmann Takes Full Ownership of BMG

Shareholders drive company buy out of Kohlberg Kravis Roberts stake

Bertelsmann Takes Full Ownership of BMG

Media giant Bertelsmann’s decision to buy equity firm Kohlberg Kravis Roberts’ 51% stake in their music joint venture BMG was one made at the right moment, according to BMG CEO Hartwig Masuch.

The buyout was announced late Thursday. Bertelsmann, based in Gutersloh, Germany, re-established BMG as an in-house unit in late 2008. It had been involved in talks to acquire New York investment firm KKR’s share in the joint venture, formed in July 2009, since mid-2012.

“The mandate now from our shareholders is, we want it controlled 100%,” Masuch told Daily Variety. “It’s a family (operation), and the (Mohn) family decided that BMG is one of their most important strategic initiatives going forward…(They said), let’s do it now, this is the right moment. We have enough financing to do it ourselves, and no, we don’t want to bring in a new partner. That was the position of the family, and they executed it.”

Details of the transaction are confidential. However, a source indicates that KKR would receive approximately $911.5 million, representing the investment firm’s share in the company and Bertelsmann’s debt.

The sell-off, which is subject to European regulatory approval, is expected to close before mid-year. The buyout will make BMG a standalone Bertelsmann unit worth $1.4 billion.

Bertelsmann was previously involved in another joint venture. In 2004, BMG, which had acquired RCA’s assets in 1987, entered a joint venture with Sony Music, which lasted until 2008 when Sony bought out BMG’s interest. Bertelsmann had sold BMG’s music publishing interests, then headed by Masuch, to Universal Music Group in 2006.

BMG is perhaps the most rapidly growing division in Bertelsmann’s portfolio. The company also owns publisher Random House, magazine arm Gruner and Jahr, broadcaster RTL and production company FremantleMedia, producer of “American Idol” and “The X Factor.”

The Bertelsmann-KKR separation was an inevitability; Masuch notes that such equity group joint ventures operate within limited time frames — usually no more than seven years — before profits are redistributed to investment partners.

Masuch adds that KKR’s exit will give BMG freedom to pursue acquisitions: “We’ll have a better scenario now, because obviously the private equity return expectations are very, very aggressive, which had a significant impact on our cost of capital for any acquisitions.”

Bertelsmann chairman-CEO Thomas Rabe said in a statement on Friday, “This is a great day for Bertelsmann: We are bringing the music home to our group. A few years after our exit from the traditional music business, in association with KKR, we have succeeded in building the world’s fourth-largest music rights management business.”

Over the last three years, BMG has aggressively pursued acquisitions with financial backing from KKR, which controls an investment fund with $75.5 billion in assets.

BMG now owns the catalogs of independent music publishing firms Evergreen, Cherry Lane, Bug and Chrysalis; late last year, the company bought the Virgin Music catalog in UMG’s sell-off of EMI assets.

It has also recently been in the hunt for recorded masters, securing the Sanctuary and Mute catalogs in UMG’s regulator-mandated divestments. BMG bid in UMG’s auction of Parlophone, but in January Warner Music Group prevailed, securing the EMI unit for $765 million.

A source acknowledged that BMG has talked with Village Roadshow about acquiring its Concord Music Group, which owns the gigantic Fantasy, Rounder and Stax catalogs and has issued albums by Paul McCartney, Joni Mitchell and James Taylor on its Hear Music imprint.

Bertelsmann’s music arm has also released new projects by Bryan Ferry and Anastacia, and recently announced a deal with Boyz II Men for masters and publishing.

An interview with Masuch about BMG’s growth and business strategy is in the weekly edition of Variety.