Description of Business and Organizational Structure
Bertelsmann is active in the core business fields of media and services in around 50 countries worldwide. The geographic core markets are Western Europe – in particular, Germany, France, the UK and Spain – and the United States. In addition, Bertelsmann is strengthening its involvement in growth markets such as China, India and Brazil. The Bertelsmann divisions are RTL Group (television), Penguin Random House (books), Gruner + Jahr (magazines), Arvato (services) and Be Printers (printing).
Bertelsmann SE & Co. KGaA is a capital market-oriented but unlisted partnership limited by shares. As a Group holding company, it exercises central corporate functions such as the development of the Group’s strategy, capital allocation, financing and management development. Internal corporate management and reporting follow the Group’s organizational structure, which consists of the operating divisions plus Corporate Investments and Corporate Center.
RTL Group is the leading European entertainment network with interests in 55 television channels and 27 radio stations and content production throughout the world. The television portfolio of RTL Group includes RTL Television in Germany, M6 in France and the RTL channels in the Netherlands, Belgium, Luxembourg, Croatia, Hungary and India, as well as the participations in Atresmedia in Spain and RTL CBS Asia Entertainment Network in Southeast Asia. RTL Group’s content production arm, Fremantle Media, is one of the largest international producers outside the United States. RTL Group S.A. is listed on the German MDAX index.
Penguin Random House is the world’s largest trade book publisher with nearly 250 editorially independent imprints across five continents. The best-known publishing brands include illustrious publishing houses such as Doubleday, Viking and Alfred A. Knopf (United States), Ebury, Hamish Hamilton and Jonathan Cape (UK), Plaza & Janés (Spain) and Sudamericana (Argentina) as well as the international book publisher DK. Each year Penguin Random House publishes over 15,000 new titles and sells over 700 million books, e-books and audio books. More than 77,000 English-, German- and Spanish-language Penguin Random House titles are now available as e-books. Germany’s Verlagsgruppe Random House is not part of Penguin Random House from a legal point of view, but is under the same corporate management and is part of the Penguin Random House operating division.
Gruner + Jahr is represented in over 30 countries with around 500 media activities, magazines and digital businesses. G+J Deutschland publishes well-known magazines such as “Stern,” “Brigitte” and “Geo.” Gruner + Jahr owns 59.9 percent of Motor Presse Stuttgart, one of Europe’s biggest special-interest magazine publishers. Gruner + Jahr’s largest foreign company is Prisma Media, the second-largest magazine publisher in France. Gruner + Jahr’s publishing activities also include magazine, sales and marketing operations in Austria, China, Spain, the Netherlands, Italy, India and the Adriatic Region.
Arvato is a global services provider that supports business customers from a wide range of industries in over 35 countries in successfully shaping their customer relationships. Arvato provides solutions for a variety of business processes via the Solution Groups Customer Relationship Management (CRM), Supply Chain Management (SCM), Financial Solutions, IT Solutions and Digital Marketing as well as Print Solutions and Replication.
Be Printers is an international printing group that operates gravure and offset printing plants at 18 production locations in Germany and the UK (Prinovis), in Italy and Spain (Southern Europe) and in the United States and Colombia (Americas). In addition to magazines, catalogs, brochures, books and calendars, the production portfolio of Be Printers includes digital communication services.
Bertelsmann’s remaining operating activities are grouped under Corporate Investments. Among others, these include the music rights company BMG, education-related activities and the Club and Direct Marketing businesses. Bertelsmann Digital Media Investments (BDMI), Bertelsmann Asia Investments (BAI) and other fund activities in the growth regions are also allocated to Corporate Investments.
Bertelsmann SE & Co. KGaA is an unlisted partnership limited by shares. Three foundations (Bertelsmann, Reinhard Mohn Stiftung and BVG-Stiftung) indirectly hold 80.9 percent of Bertelsmann SE & Co. KGaA shares, with the remaining 19.1 percent held indirectly by the Mohn family. Bertelsmann Verwaltungsgesellschaft (BVG) controls all voting rights at the General Meeting of Bertelsmann SE & Co. KGaA and Bertelsmann Management SE.
As an international media group, Bertelsmann occupies leading market positions in its core sectors of television, books, newspapers, services and print. Bertelsmann’s primary objective is continuous growth of the company’s value through a sustained increase in profitability (see section “Value-Oriented Management System”).
Bertelsmann aims to achieve a faster-growing, more digital and more international Group portfolio. As well as investments in existing activities, new business segments are being increasingly explored that supplement the established businesses and provide a broader overall revenue structure. The further development of the portfolio is subject to clear investment criteria. Businesses in which Bertelsmann invests should have long-term stable growth, global reach, stable and protectable business models, high market entry barriers and scalability. The Group currently has two main earnings pillars, media and services, with a third supporting pillar, education, due to be added in the medium term. Group strategy comprises four strategic priorities, which constituted the key work aspects for the Executive Board in 2013: strengthening core businesses (in particular, investments in creative businesses, exploiting opportunities for consolidation); driving forward the digital transformation of all core businesses; developing growth platforms in the divisions (in particular, Financial Services and TV production) and at the Group level (music rights and education); and expanding in growth regions (China, India and Brazil).
In financial year 2013, Bertelsmann made progress in all four strategic priorities. For example, RTL Group expanded its families of channels and the production business. The book publishing business was strengthened through the merger of Random House and Penguin Group to form the world’s largest trade book publisher. Bertelsmann holds the majority of shares in the new publishing group (53 percent).
Gruner + Jahr completed a restructuring of the company according to defined Communities of Interest. Arvato was reorganized into Solution Groups and countries on the basis of a multidimensional structure, thus strengthening interdivisional cooperation as well as the key account management for its most important customers. The consolidation measures were intensified in structurally declining businesses, such as Be Printers and the Club and Direct Marketing activities. These measures included, for example, the announced closure of the Prinovis Itzehoe location in April 2014.
Bertelsmann is making significant progress in driving forward the digital transformation. In 2013, RTL Group’s online offerings generated a total of 16.8 billion video views. Through a strategic partnership with the Canadian multichannel network BroadbandTV, RTL Group became the third-largest provider on YouTube (excluding music video services). Penguin Random House now offers more than 77,000 titles as e-books worldwide. As part of the organizational interlinking of print and online, Gruner + Jahr has strengthened its commitment to e-magazines, apps and mobile offerings. Arvato continued to benefit from the expansion of its digital services for customers in the IT, high-tech and e-commerce sectors.
The development of the growth platforms was successfully continued. In the reporting period, Bertelsmann completed the full acquisition of the music rights group BMG and expanded it. Signings of top-level artists such as Mick Jagger and Keith Richards from the Rolling Stones as well as Robbie Williams and the Backstreet Boys contributed to the expansion. Arvato acquired the financial services provider Gothia. The education business was expanded.
Progress was also achieved with the regional expansion in growth regions. RTL Group expanded into Southeast Asia in conjunction with CBS. In the book publishing segment, Bertelsmann strengthened its presence in China, India and Latin America through the merger of Penguin and Random House. Arvato achieved further profitable growth with its services in China. The investment fund Bertelsmann Asia Investments expanded its investment portfolio and achieved a very positive value performance.
Bertelsmann generated proceeds of around €1.5 billion by placing a total of 25.5 million RTL Group shares in 2013, while retaining a participation level of over 75 percent.
In 2014, Bertelsmann will pursue the four strategic priorities mentioned. The success of Bertelsmann in the future will continue to be driven by content-based and entrepreneurial creativity, which is why the Group continues to invest in the creative core of its businesses. In addition, Bertelsmann needs to have qualified employees at all levels of the Group to ensure its strategic and financial success. The compliance with and achievement of the strategic development priorities are continuously examined by the Executive Board at divisional level through regular meetings of the Strategy and Business Committee and as part of the annual Strategic Planning Dialog between the Executive Board and the Supervisory Board. In addition, relevant markets and the competitive environment are analyzed on an ongoing basis in order to draw conclusions concerning the further development of the Group’s strategy. The Executive Board is also supported by the Group Management Committee (GMC) on issues of corporate strategy and development. This Committee is composed of executives representing key businesses, countries, regions and selected Group-wide functions.
Value-Oriented Management System
Bertelsmann’s primary objective is continuous growth of the company’s value through a sustained increase in profitability. In order to manage the Group, Bertelsmann has been using a value-oriented management system for many years, which focuses on revenues, operating earnings and optimum capital investment. For formal reasons, Bertelsmann makes a distinction between strictly defined and broadly defined operational performance indicators.
Strictly defined operational performance indicators, including revenues, Operating EBIT as well as Bertelsmann Value Added (BVA), are used to directly assess current business performance and are correspondingly used in the outlook. These are distinguished from performance indicators used in the broader sense, which are partially derived from the above-mentioned indicators or are strongly influenced by these. These include the return on sales and the cash conversion rate. The financial management system with defined internal financing targets is also part of the broadly defined value-oriented management system. Broadly defined performance indicators are – if they are used at all – only voluntary predictions that are not included in the outlook as they are not directly relevant for management purposes.
Strictly defined operational performance indicators
In order to control and manage the Group, Bertelsmann uses revenues, operating EBIT and BVA as performance indicators. Revenue is used as a growth indicator of businesses. In financial year 2013, Group revenues rose 1.8 percent to €16.4 billion (previous year: €16.1 billion). Operating EBIT serves as an indicator of the profitability of the operating businesses. Operating EBIT is calculated before interest and taxes and adjusted for special items. This procedure yields a normalized, sustainable indicator of performance that helps to improve predictability and comparability. In the reporting period, operating EBIT of €1,754 million was slightly above the previous year’s high level (previous year: €1,732 million).
Bertelsmann uses BVA for assessing the profitability of operations and return on invested capital. BVA measures the profit realized above and beyond the appropriate return on invested capital. This form of value orientation is reflected in strategic investment and portfolio planning and the management of Group operations and, together with qualitative criteria, forms the basis for measuring the variable portion of management compensation. BVA is calculated as the difference between net operating profit after tax (NOPAT) and the cost of capital. NOPAT is calculated as operating EBIT after modifications and less a flat 33-percent tax. Cost of capital is the product of the weighted average cost of capital (WACC) and the level of capital invested. The uniform WACC after taxes is 8 percent. Invested capital is calculated on the basis of the Group’s operating assets less non-interest-bearing operating liabilities. The present value of operating leases is also taken into account when calculating the invested capital. BVA in financial year 2013 was €283 million compared with the previous year’s figure of €362 million. The decline is mainly attributable to the increased acquisition activity and the revaluations carried out in the course of company transactions.
Broadly defined performance indicators
In order to assess business development, other performance indicators are used that are partially derived from revenues and operating EBIT or are strongly influenced by these figures.
The cash conversion rate serves as a measure of cash generated from business activities and is calculated as the ratio of operating free cash flow to operating EBIT. Operating free cash flow does not reflect interest, tax or dividend payments, is lowered by operating investments such as replacement and expansion investments as well as changes in working capital, and is adjusted for special items. The Group aims to maintain a cash conversion rate of 90 to 100 percent as a long-term average. The cash conversion rate in financial year 2013 was 100 percent (previous year: 107 percent) and therefore within the target corridor.
The return on sales is calculated as the ratio of operating EBIT to revenues, which is used as an additional criterion for assessing the business performance. Bertelsmann aims to achieve return on sales of at least 10 percent at Group level. Return on sales in financial year 2013 was 10.7 percent (previous year: 10.8 percent).
In view of the Bertelsmann Group’s growth strategy and the associated expansion of investment activity, it will focus more closely on operating EBITDA. In this context, operating EBITDA is defined as earnings before interest, taxes and depreciation, and is adjusted for special items. As operating EBITDA is not distorted by the accounting-related effects of acquisitions, it is a meaningful earnings indicator, which is also used as a standard internationally and has been introduced on the capital markets.
Bertelsmann’s financial management and controlling system is defined by the internal financial targets outlined in the section “Net Assets and Financial Position.” These financing principles are pursued in the management of the Group and are included in the broadly defined value-oriented management system.
The non-financial performance indicators (employees, corporate responsibility and innovations) are not included in the broadly defined value-oriented management system. As the non-financial performance indicators can only be measured to a limited extent, they are not significant for the management of the Group as it is not possible to make any clear statements concerning interrelated effects and increased value.
Overall Economic Developments
The global economy in 2013 reflected the moderate growth level of the previous year. Real GDP increased by 2.9 percent in 2013 compared with a rise of 3.1 percent in 2012. While tensions eased on the international financial markets, economic expansion in the threshold countries remained sluggish.
The US economy continues to follow a gradual path of recovery. According to the US Bureau of Economic Analysis, real GDP in the United States in 2013 was 1.9 percent compared with 2.8 percent in 2012. Growth stimuli were provided primarily by the expansion of private consumer spending, private asset investments and exports.
The euro zone came out of the recession over the course of 2013. However, the European debt crisis has not yet been resolved, and the economic situation in the euro zone remains fragile. According to the Statistical Office of the European Union, real GDP fell by 0.5 percent in 2013, having fallen 0.7 percent in 2012.
After a weak start to the year, the German economy began to pick up during 2013. Overall, according to the Federal Statistical Office, real GDP increased by 0.4 percent in 2013 compared with a rise of 0.7 percent in 2012. Domestic stimuli played a key role in the turnaround at the end of the year. Private consumption benefited from favorable employment and income prospects and the ongoing low-interest environment.
Developments in Relevant Markets
The following analysis pertains only to markets and regions of a sufficient size if their trend can be adequately aggregated and is important for the business development of Bertelsmann businesses.
With the exception of Germany, the European TV advertising markets largely declined in 2013.
The German- and Spanish-language book markets proved mostly stable overall in 2013. The book markets in the United States and the UK showed a slight decline after the exceptional bestseller performance of the previous year. The global growth of e-books continued. Germany, in particular, recorded significant growth, while growth in the United States and the UK declined slightly.
In 2013, the magazine markets in Germany, France, Spain and China were characterized by sharply falling advertising markets in some areas. Magazine sales in the core European countries declined due to a downward trend in circulations.
The service markets (CRM, SCM, Financial Services, IT Services and Digital Marketing) achieved positive growth. By contrast, the storage media markets declined significantly worldwide due to the increasing importance of electronic forms of distribution.
Overall, the European print markets for magazines, catalogs and promotional materials declined in 2013 due to the ongoing pressure on prices and volumes. Likewise, the print market for books in North America continued to decline in 2013.
Bertelsmann has television and radio operations in several European countries that are subject to regulation. In Germany, for example, media are subject to oversight by the Commission on Concentration in the Media. Bertelsmann Group companies occupy leading market positions in many lines of business and may therefore have limited potential for growth through acquisition due to antitrust legislation.
As its profit participation certificates and bonds are publicly listed, Bertelsmann is required to comply in full with capital market regulations applicable to publicly traded companies.
Significant Events in the Financial Year
On January 1, 2013, Christoph Mohn became the new Chairman of the Supervisory Board of Bertelsmann SE & Co. KGaA and of the Supervisory Board of Bertelsmann Management SE. In both positions, Christoph Mohn succeeded Gunter Thielen, who resigned from the Supervisory Board upon reaching retirement age as of the end of 2012.
In February 2013, the Prinovis group, which is part of Be Printers, announced the closure of its gravure printing facility in Itzehoe. The continued difficult situation in the European gravure printing market as a result of continued pressure on prices and lower volumes were key issues behind the closure decision. The negotiations concerning the compensation and redundancy package were agreed in June 2013. As part of the compensation package, it was agreed to cease production in Itzehoe as of April 30, 2014.
At the end of March 2013, Bertelsmann concluded the full acquisition of the music rights company BMG Rights Management after the deal was approved by the antitrust authorities. In this regard, Bertelsmann acquired the remaining shares it had not previously held and since then has carried BMG Rights Management as a wholly owned subsidiary. There were further artist signings and takeovers of music catalogs in the reporting period.
On April 1, 2013, Achim Berg simultaneously became CEO of Arvato AG and a member of the Executive Board of Bertelsmann Management SE. Achim Berg thereby succeeded Rolf Buch who had resigned as head of Arvato and had also resigned his Executive Board mandate for Bertelsmann Management SE as of the end of 2012. In fall 2013, Berg announced a reorganization of Arvato. The businesses are organized according to Solution Groups and countries on the basis of a multidimensional structure. In addition, a central Key Account Management department has been introduced for key customers. The aim of the new organizational structure is to promote innovation, internationality, cooperation and the transfer of knowledge within Arvato.
At the end of April 2013, Bertelsmann placed 23.5 million RTL Group shares at a price of €55.50 per share. The proceeds from the reduction of the shareholding will be used to implement Bertelsmann’s growth strategy. The share capital of RTL Group was admitted for trading on the Prime Standard of the Frankfurt Stock Exchange and in September 2013 was listed on the German MDAX index. In October 2013, Bertelsmann placed an additional two million RTL Group shares, which originated from the non-exercised over-allotment option, at a price of €75.81 per share. Bertelsmann remains the clear majority shareholder in RTL Group with a 75.1-percent stake in share capital.
In June 2013, Bertelsmann announced that the operations of the direct marketing company Inmediaone would be gradually closed down and that it would cease trading in mid-2014 due to a lack of economic prospects.
In mid-June 2013, Arvato completed the acquisition of Gothia Financial Group and has since been in the process of merging the existing financial services business of its subsidiary Arvato Infoscore with that of Gothia. The merger will strengthen the growth businesses in the area of Financial Services and will help make Arvato’s businesses more international.
On July 1, 2013, the Penguin Random House merger was completed. Bertelsmann and Pearson had already announced their intention to combine the activities of their respective book publishing companies, Random House (with the exception of the German-language publishing business) and Penguin Group, in October 2012. Bertelsmann holds a 53-percent interest in the new trade book publishing group Penguin Random House, with Pearson holding 47 percent. Penguin Random House comprises all of the publishing units of Random House and the Penguin Group in the United States, Canada, the UK, Australia, New Zealand, India and South Africa as well as the Random House publishers in Spain and Latin America and the Penguin businesses in the Asian region and Germany. Reviews by the authorities in several countries around the world preceded the closing of the merger.
In August 2013, the cooperation between RTL Group and CBS Studios International in the new company RTL CBS Asia Entertainment Network and the joint launch of two pay-TV channels in Southeast Asia were announced. The two channels will broadcast in English and local languages in several Asian markets and will be transmitted in high-resolution HD standard via cable, satellite and Internet TV.
In December 2013, the disposal of the Czech-Slovakian book and publishing house Euromedia Group to the Czech investment firm Arraviet was agreed. The transaction includes all Euromedia business in both countries, namely book clubs, book trade, distribution and publishers. The disposal of Euromedia Group is subject to the approval of the responsible antitrust authority in the Czech Republic.
Effective December 31, 2013, Thomas Hesse, member of the Executive Board of Bertelsmann Management SE and President, Corporate Development and New Businesses, resigned his mandate. His areas of responsibility were taken over by CEO Thomas Rabe.