RTL is a gamble on the future of old-fashioned TV

Bertelsmann is reducing its exposure to TV by selling a chunk of RTL. The German broadcaster seems well-placed to deal with the status quo, but the longer term prospects are less clear. Internet distribution channels present free-to-air terrestrial TV huge headaches.

The rise of the Internet has already forced change in the way the music industry and the print media do business. Television could be next in line. New media consumption patterns, as well as fierce competition for advertising revenue from Google, among others, are likely to shake up traditional business models.

RTL’s majority owner Bertelsmann insists its decision to reduce its stake from 92.3 percent to slightly more than 75 percent has nothing to do with such worries. Bertelsmann says it is determined to retain control but wants to free up some cash for investments in other growth opportunities.

For the time being, the digital threat to RTL is largely hypothetical. Traditional television is still the most influential mass media. Indeed, data by market researcher Screen Digest show that people are spending seven minutes more time per day in front of the telly than in 2008. Web-based on-demand services have yet to dent traditional TV consumption. The industry’s share on the advertising market is stable.

Moreover, RTL is well-placed to serve the market as it currently exists. It is the leading broadcaster in Germany, the Netherlands and Belgium and is a strong number two in France. It also owns Fremantle Media, a globally successful production company responsible for X-Factor and American Idol. Generating a third of RTL’s revenue, Fremantle mitigates the dependency on advertisement.

The broadcaster boasts a decent profit history, even if Europe’s economic woes leave scars. Revenue was up 4 percent in 2012 while earnings before interest and taxes shrank by a fifth. Underline the economic uncertainty, the management has not yet issued guidance for 2013.

At the current share price, which sits in the middle of the range given as part of Bertelsmann’s decision to sell down its stake, the stock trades at 12.6 times the Starmine estimates of next year’s earnings. That represents a modest discount to the average of European media companies, though the gap to direct peers like Italy’s MediaSet and Germany’s ProSiebenSat1 is bigger.

If RTL has what it takes to thrive in the digital environment, shares may prove a bargain at the current price. At present, the market seems to be expressing doubt that RTL can rise to meet the challenges posed by a digital future.

This article was initially  published as a Reuters Breakingviews comment on 17 April 2013.

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