March 17, 2000 12:45 PM PST

AOL to buy Bertelsmann stake in AOL Europe, Australia

America Online today took decisive action to gain control of its online presence worldwide.

The Internet services giant said it is buying German media company Bertelsmann's 50 percent stake in AOL Europe and AOL Australia in a stock deal worth between $6.5 billion and $8.25 billion.

You've got Time Warner The buyout had been expected ever since AOL announced it would acquire Bertelsmann rival Time Warner in January. Reports in the German press in early February indicated that the two companies had been in talks.

The AOL and Time Warner merger announcement also prompted the resignation of Bertelsmann chief executive Thomas Middlehoff from AOL's board in January because it put the German media group in competition with AOL Time Warner's music interests.

The companies said that Michael Lynton, president of AOL International, will become acting CEO of AOL Europe. The company's current president and chief executive officer, Andreas Schmidt, will stay on during a transition period before returning to Bertelsmann.

Booming growth in the number of Europeans accessing the Web has spurred a race among U.S. and European Net companies to gain customers. Although AOL dominates the U.S. market, its European venture had struggled to take off until Schmidt signed on early last year. Upon his arrival, AOL Europe reorganized into units operating independently for each country, launched a major advertising campaign, and saw its subscriber rolls grow.

Still, analysts said AOL Europe's performance has always been buried beneath subscriber growth figures and murky profit forecasts. With its acquisition of Bertelsmann's 50 percent stake, analysts said AOL will have to conform to accounting regulations and report financial numbers on the AOL Europe business.

"Subscriber growth figures do matter, but they pale in importance compared to the bottom line," said David Simons, managing director at institutional research firm Digital Video Investments.

Seeing these figures is especially important now, he added, as AOL will have to assume Bertelsmann's share of the operating expenses.

"If AOL Europe is profitable, then it's not a problem," Simons said. "But if they are going to have to spend twice as much in a (losing venture), then that's a big deal."

As part of a separate agreement, AOL and Bertelsmann today said they are forming an alliance to expand the distribution of Bertelsmann's media content and e-commerce properties over AOL's interactive brands worldwide. Bertelsmann's music, magazine, book and other entertainment properties, book and music clubs, and e-commerce sites will be featured on AOL, CompuServe and Netscape Online interactive services.

Bertlesmann will in return promote AOL through its various media properties and will attempt to add 1 million new AOL subscribers from its own customer base. The separate alliances are worth a total of $250 million, the companies said.

"This new four-year, $250 million global alliance extends Bertelsmann's content on all of the AOL network and will help AOL further expand in Europe and globally," AOL chief executive Steve Case said in a press conference this morning.

Bertelsmann said it would use the proceeds from selling its stake in AOL Europe to build its existing e-commerce business and provide seed money for new e-commerce and online media content activities.

AOL Europe reaches more than 3.4 million subscribers through its AOL and CompuServe services, and 400,000 people use its free Netscape Online service.

The company competes with Deutsche Telekom's T-Online Internet service, which has more than 4.2 million members.

News.com's Sandeep Junnarkar contributed to this report.

 

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