[A-List] Germany: Kirch crisis

[Keaney Michael]

Kirch exits his crumbling empire
The diversified German media group faces an uncertain future after its founder's departure, says Bertrand Benoit and James Harding
Financial Times: March 27 2002

Leo Kirch, the man, is undone. But the undoing of Kirch, the media business, has only just begun.

On Tuesday, investors and bankers in KirchMedia, the arm of the empire that includes Germany's biggest family of TV channels as well as Europe's largest film and TV rights library, were meeting to discuss a takeover. If it can be agreed, it would leave Mr Kirch with a meaningless minority shareholding. (He would have 14 per cent of the business, but it would be pledged to the banks.)

The investors in Kirch-Media - Rupert Murdoch's News Corporation; Silvio Berlusconi's Fininvest and Mediaset groups; US investment bank Lehman Brothers; Saudi investor Prince Alwaleed's Kingdom Holdings; and specialist investor Capital Research - have been invited to invest a further E800m (£493m) and take control. The rest of the Kirch assets - Premiere, the pay-TV platform; the broadcasting rights to Formula One motor racing; and the stake in Axel Springer, the German publisher of the Bild newspaper - have been put up for sale.

Kirch's advisers are calling it a "rescue". But it looks remarkably like a liquidation. The founder has been marginalised and the business is being carved up. Two questions arise. How did such a powerful man fall so far, so fast? And, what now?

Mr Kirch owes his demise to put options, privacy and poor management. The put options triggered the crisis.

Mr Kirch has long been adept at balancing huge debts with mammoth assets. But in the past three years, rather than secure straight equity investments, he offered put options to secure fresh funds. These were in effect investment guarantees. Would-be investors could commit money, safe in the knowledge that they would be paid back in cash whatever they had invested, plus interest, even if the business failed to grow.

Late last year, it became clear that Kirch Gruppe would have to answer a E1.7bn put option held by Mr Murdoch, a E767m put option held by Axel Springer and a E1bn-plus put option held by Prince Alwaleed, Lehman Brothers, Mr Berlusconi's businesses and Mr Murdoch's News Corp. Kirch did not have the cash to honour one of these contracts, let alone all of them.

The impending liquidity crisis prompted a new level of scrutiny. Bankers and investors found a business that had, by its own admission, a culture of secrecy. Parts of the business were audited, parts were not. Some assets, secured as collateral against loans, seemed to have been used again to secure fresh lending.

Kirch's most glaring miscalculation, though by no means the only one, was Premiere, its pay-TV unit. "The basic failure was to be wildly over-optimistic about what pay-TV could achieve in Germany and not to correct these estimates even as it had become clear they were unachievable," says Stefan Weiss, analyst at West-LB Panmure.

Premiere had 2.4m subscribers in December but was still buying film rights priced for an audience of 4m. According to one Hollywood executive, Kirch would regularly pay three to four times more for a TV mini-series than any other pay-TV platform in Europe.

As a result, Premiere's programming costs were 1.7 times those of BSkyB last year despite lower revenue per user. Premiere, which lost E864.9m in 2001, more than E2.3m a day, came to be known as Kirch's "bleeding artery". As Mr Kirch bows out, then, he leaves a tarnished prize. The assets are attractive: Formula One, a 40 per cent stake in Axel Springer and the biggest pay-TV platform in Europe's largest media market. But there are also E6.5bn in debts and more than E2.3bn in contingent liabilities. The assets are security against bank loans, meaning that many are already in effect owned by creditor banks.

One of the first decisions, once KirchMedia's new shareholding structure and fresh credit lines are agreed, will be to appoint new managers. The next task will be to disentangle the complex web of relationships now binding KirchMedia to Premiere and ProSiebenSAT.1, its partially listed free-TV subsidiary.

The managers will have to put an end to the KirchMedia habit of using the broadcasters at ProSieben and Premiere to subsidise KirchMedia's overpriced rights acquisitions. This, in turn, will mean a complete rewrite of the business plan. And a clean slate will also require KirchMedia to renegotiate the expensive long-term pay-TV output deals it struck with US studios on behalf of Premiere. According to West-LB, KirchMedia has total commitments relating to pay-TV rights of at least E3bn up to 2008.

"If Hollywood wants the German market to remain a major market, with competing bids for its movies, it will have to renegotiate its contracts," says one person in the middle of the rescue efforts. "They will have to make a major sacrifice, like the investors and like the banks."

That may not go down well with the studios. But that is the easy part. Kirch still has to resolve the future of Premiere and the put options. If the banks provide a bridge loan to KirchMedia and investors agree to take the company over after due diligence, the whole thing can still collapse if the future of Premiere is not resolved.

Premiere and KirchMedia are intertwined. If Premiere were declared insolvent, KirchMedia, would be forced into insolvency too, according to executives.

Finding a buyer for Premiere will be difficult. British Sky Broadcasting, Mr Murdoch's pay-TV business in the UK, has said it is not interested. Others have looked and walked away.

In addition, BSkyB can force the holding company to buy back its 22 per cent stake in Premiere for E1.7bn in October. Publisher Axel Springer has exercised a E767m option on its 11 per cent stake in ProSieben, which becomes due at the end of April.

Finally, the sale of non-core assets, most of them pledged as collateral for short-term bank loans, should help the group slash a large portion of its debt burden.

The 40 per cent stake in Axel Springer already has a buyer - HypoVereinsbank has informally offered E1.1bn. Mr Berlusconi's Mediaset and Spanish investors have offered to buy Kirch's 25 per cent of Spanish broadcaster Telecinco. More challenging will be the sale of Kirch's direct and indirect 75 per cent holding in SLEC, the trust that owns the rights to Formula One events.

In the murky and unstable world of Kirch, there was only one certainty yesterday. "Leo Kirch is out," said one person involved in the negotiations. "The chances of this going bankrupt are still 50-50."

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT354906AZC&live=true

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi