Focus: Sex sells, even in a deflating market

AN UNUSUAL crowd is sipping champagne on the 49th floor of the Commerzbank tower. Bankers in sober suits ogle the waitresses: leggy, under-dressed young things straight out of a men's magazine. In the middle of the melee , an elderly woman fixes her piercing blue eyes on the cameras, while the PR people work on the assembled journalists, each hack clutching a little gift package tied with a pink ribbon. "Share our sexy business," urges a poster at the entrance.

This is the pre-launch party for Beate Uhse AG, the most exotic company to come to the German stock market so far, and the first from this business to be listed anywhere in Europe. Beate Uhse has a chain of sex-shops, erotic publications and Internet sites. Not the kind of outfit one associates with the Mittelstand. Yet no one, apart from Deutsche Bank which declined the honour of organising the flotation on "ethical grounds", seems to mind. In Frankfurt these days, anything goes.

Stagnant for decades, the city's trading floors have witnessed an explosion of activity in the last two years, as businesses abandon the habits of a lifetime and go to the markets, rather than to the banks, in search of capital. The Neuer Markt, Frankfurt's answer to the Nasdaq, is brimming with new issues. Founded in 1997, it has just listed its 100th company, with 30 more to go public within months. The SMAX, the segment catering for long-established family firms, already boasts more than 60 companies on its list after less than a month of existence.

The SMAX is where Beate Uhse will be traded from tomorrow. It is a mature company, promising uninterrupted growth, according to the prospectus, in an activity guaranteed to be recession proof. "We can only dream of its beautiful figures," gushed Klaus Muller-Gebel, a Commerzbank board member. The bank, Germany's fifth largest, is the lead manager for the issue aimed at raising DM120m by selling 8.4m shares.

The figures he was referring to show 98 per cent of German adults, and probably quite a few children, have heard of Beate Uhse, and have a pretty good idea of what it sells. Beate Uhse shops stand on the high street of every major and medium-sized German town, the magazines can be bought at all good newsagents, and those not living near a shop or franchise are catered for by an efficient mail order outfit. The heavy-breathing phone lines reach even the unsighted.

In a business where size really does matter, Beate Uhse is the biggest, at least on this side of the Atlantic. Last year it posted sales of DM169m (pounds 54m), which this year are projected to soar to DM235m. The company needs new capital to expand further into the Internet, where growth lies, into Western Europe, the US and eventually Eastern Europe. "We are looking for potent markets," said Chief Executive Hans-Dieter Thomsen. "By that I mean markets with money."

Mr Thomsen says that even at 64, he has the vigour to lead the company. Age is an issue, because the company's legendary owner, Beate Rotermund - Uhse was the name of a previous husband - is 79 with a hint of a hearing problem. Potential investors are concerned about the "generation question". Even by her own admission Ms Rotermund is slowing.

"I used to test my products myself," she says. "But now I have qualified staff to do this." Ms Rotermund is a well-known personality in Germany, with frequent appearances on all kinds of television shows. Despite her years she remains the company's greatest marketing asset.

In Germany she is a household name; a symbol of the freedoms Germans embraced after the war. The prospectus only slightly exaggerates when it credits her with sexual liberation. Ms Rotermund opened the world's first sex shop back in 1962, in the small north German town of Flensburg, where the company still has its headquarters.

Her roots are somewhat exotic rather than erotic. "I was a test pilot during the war," she says. "At the end, I flew the last plane out of Berlin with my two-year-old son."

She landed in a tiny village in Schleswig-Holstein. "After a while the men came back from the front," she says. "A great joy for the village but great sadness three months later. All the women were pregnant, and there was nothing to eat".

The women were ignorant of the facts of life. They knew nothing of contraception, and even if they had, there was not much they could have done about preventing pregnancy.

Enlightening them became Beate Uhse's business. She had heard of "natural contraception" from her mother. She printed instruction leaflets, and started selling them door to door. That was the beginning of Beate Uhse AG. Later, she produced manuals, much admired by customers for their pictorial content.

She seemed to be one step ahead of the market and competitors. "I think I had the edge because I'm a woman," she says. "I never had the trouble delegating to my colleagues." The other secret of her success was her unique money-back guarantee to unsatisfied customers.

The business has moved on a bit and Ms Rotermund can be excused for straining to keep up. Technological development has left her especially bemused, provoking accusations from the board that she is too "conservative". Thus, her colleagues see rich rewards in virtual reality, but the founder remains sceptical. "As long as people live, a walk in the moonlight will always be more attractive to a couple than cyber-sex," she says.

Despite her reservations, the management plans to digitise the video booths in the shops and acquire an Internet search engine. The projections show future revenue will come from the various "multi-media" applications. Customers clearly favour this domain because, says Mr Thomsen: "You don't get ill and don't get pregnant from online sex."

The founding family - Ms Rotermund and her sons - will retain two thirds of the company even after tomorrow's flotation. The expectations were that Beate Uhse would clean up but instant richesse can no longer be taken for granted. Gains at Frankfurt have been legendary in the last two years, with shares in new companies frequently oversubscribed 10 to 15 times. But the Klondike days in Frankfurt are ending. In the last two weeks, some shares have begun to dip below their launch price. "There are too many new issues coming to the market," says David Abraham, German analyst at Goldman Sachs. "People are being swamped. And investors are beginning to get very choosy."

Tomorrow their choice may come down to a soar-away software company that no one has ever heard of, or the well-established business Beate Uhse, whose share certificate depicts two lightly clothed women set against the silhouette of a reclining nude. Which one will Frankfurt's money-men want to get their hands on?