VSS Earns 3X Money After Euro Backlash

When LBO firm Veronis Suhler Stevenson teamed up with British newspaper veteran David Montgomery in October 2005 to lead the first takeover of a German newspaper publisher, they became Exhibit A in the backlash against buyout “locusts.” Now VSS is bidding auf Wiedersehen to Berliner Verlag Deutsche Zeitungsholding GmbH with a 3x equity return, and a burnished image.

The New York-based media investor joined with Montgomery’s Mecom Plc 18 months ago to buy the publisher of the Berliner Zeitung, one of Germany’s best-known broadsheets, for €160 million ($213 million). Alongside VSS were two equity partners and its own mezzanine vehicle: Together they contributed €55 million in equity for a 75 percent stake. Montgomery bought 15 percent of the company, while management kept 10 percent.

Through a connection to Berliner Verlag’s owner, media conglomerate Hotlzbrinck, VSS and Montgomery were able to avoid an auction and for a time keep the deal well below the radar, said Johannes von Bismarck, a VSS managing partner in the firm’s London office. Then, two weeks before the sale was finalized, word got out, and the storm erupted, especially because Montgomery had gained a reputation as a cost-cutter when he ran The Daily Mirror and The Independent in London in the 1990s.

The editor of the Berliner Zeitung chided the buyout team in interviews and in the newspaper itself, claiming the Anglo-Saxon suitors didn’t understand the German media market. He left the paper before the deal closed. During protests, unions and workers brandished posters calling the buyers locusts. They predicted the new corporate masters would slash staff and degrade the paper’s quality. Even Germany’s former chancellor, Gerhard Schroder, and Nobel laureate Gunter Grass joined the chorus of critics.

“We were a little overwhelmed and surprised by the response,” von Bismarck said, noting that VSS operates exclusively in the media space and has taken over many publishing companies in its decades of deal-making. “This had never happened before.”

Montgomery and representatives from VSS stepped into the fray and attempted to douse the growing fire. They met often with management, editors, press workers and Germany’s largest trade union. Without promising the moon, the new buyers made it clear they expected to improve the paper’s performance through expansion, not contraction, von Bismarck said.

The buyout team also formed a special advisory committee, which included Gerd Shulte-Hillen, the former chief executive officer of Gruner & Jahr, the print publishing arm of Bertlesmann. Von Bismarck called Shulte-Hillen a “very credible figure” whose presence quelled some of the uproar. Schulte-Hillen also took a small stake in Berliner Verlag.

Still, more than rhetoric or special committees, VSS and Montgomery proved the critics wrong through action. They added a daily tabloid to the platform, the Hamburger Morgenpost, and successfully launched an employee-created Sunday edition of the Hamburg paper. The buyout team upgraded the Berlin paper’s printing press and added an Internet component called Berlin Online. Most importantly, the buyout team didn’t fire anyone and instead offered a government-backed retirement regime to employees over 55 years old.

It wasn’t just Berliner Verlag that prospered during VSS’s 18-month ownership. Montgomery’s Mecom also grew from a small firm that sought to exert a creative force through minority ownership of European media concerns into a sizeable control company whose portfolio prints 25 million issues per year in Germany, Holland, Denmark, Norway, Poland, Sweden, Ukraine and Lithuania. Mecom recently announced an initiative to raise €820 million for more acquisitions, its first purchase being Berliner Verlag.

Von Bismarck said Montgomery wanted to take full ownership of Berliner Verlag, prompting the buyout firm to divest the paper sooner than it expected. Last month, VSS sold its share to Montgomery for €163 million and, as part of the deal, took an undisclosed position in Mecom.

“We took some chips off the table because it was a very attractive offer,” von Bismark said, adding that VSS retains exposure to the European print media market through its stake in Mecom.—J.H.