01 Nov 1998

When Rupert Murdoch delayed the estimated $3 billion (£1.8 billion) share offering of his US television and film interests in mid-October, he blamed turmoil in the financial markets. He told News Corp shareholders that, "the volatility in the financial markets of the world at the moment (has) only highlighted symptoms of underlying economic problems. We seem to be moving to a period of deflation, but there is no doubt that we have seen great shocks and we may see more shocks yet." If prices are indeed falling in a deflationary way, ie due to falling demand as opposed to excess supply, then it is definitely not a good time to get the highest value for your product, be it a widget or a share offer. Murdoch is practising safe business.

Being forestalled in its IPO plans is not a big problem per se for the acquisitive News Corp, at least not today, but it could have repercussions for a big European media player who does not have the same luxury of time to sort out its financial situation.

Despite attempts to downplay its money woes, the Kirch Group is in need of cash and the sooner the better. Not only is its digital TV service DF1 more expensive than expected, the regulators, both in Germany and in Brussels, have put the kibosh on Kirch and Bertelsmann working together more closely on Premiere, Germany's oldest pay-TV channel, or merging it with DF1, Kirch's troubled digital platform. This has left Kirch to grapple with the estimated DM1 billion (£360 million) start-up costs alone, rather than splitting them with Bertelsmann. But the most serious problem facing Kirch is funding the future. Having wagered big on digital's success, Kirch signed commitments that included an estimated $4 billion (£2.4 miilion) for Hollywood films and another estimated $2.2 billion (£1.3 million) for World Cup soccer rights through 2006. With DF1's sub count liberally estimated at 200,000, there is a big shortfall between what is coming in and what needs to be paid out.

"With the investments in digital, we would be hindered in making additional significant investments of the size we think is attractive and necessary for the company to grow," admitted Dieter Hahn, vice-chairman of Kirch Group in an interview. He added that although the company's financial position, in terms of digital, is unsatisfactory, it is not hindering its current business. What it is doing is curtailing Kirch's ability to exploit future opportunities. According to Hahn, Kirch is well positioned in Europe with regards to content and has interesting distribution investments in Italy and Spain. But it will need a larger capital base in order to build on these investments.

Given the state of the equity market, Kirch is looking first to his media friends to help him out. High on the list are Murdoch, Silvio Berlusconi of Italy's Mediaset, and Saudi Prince Al Waleed. Kirch already has ties with Mediaset, both in Italy and Spain, and Mediaset owes Kirch a favour.

Before the Italian company floated its shares several years ago, Kirch bought a slice of the company, thereby giving it a private market value.

Eager as all three of these potential investors may be to own a slice of Kirch, all are going to take a hard look at the assets before paying any cash. Those assets include a 59 per cent stake in German channel Sat 1, 25 per cent in Spain's Telecinco, 33 per cent in Premiere, 100 per cent of DF1, as well as a major library of German free TV and pay-TV sport and film rights. Kirch estimates it is worth $10 billion (£6 million), but some analysts say that figure is too high by at least a third. Although the reclusive Bavarian media baron Leo Kirch - who is both company founder and chairman - may not like having a microscope on his business, he will have to suffer closer scrutiny to get even ambitious friends, such as Murdoch, to find investment cash. Berlusconi's Mediaset is probably the most motivated to invest. Financial analysts covering the company are keen to see it adopt a more European angle. Kirch's Taurus is being positioned as a European player, both in rights distribution and production, as well as distribution platforms.

For a Eurocentric group to take this step seems all the more important after Philips' break-up and sale of Polygram Filmed Entertainment to Kirk Kerkorian-backed MGM. True, Carlton of the UK might get part of the library and France's Canal+ may pick up the European distribution assets, but a company with a notable European track record in films and TV production was splintered in order to maximise its sale price. So, a refinanced and restructured Taurus could position itself, according to Hahn, for an IPO - probably in two to three years.

Kirch himself attended a gala black-tie event at the recent Mipcom'98 show in Cannes, at which Canal+ chief, Pierre Lescure, was honoured. Leo spent much of the dinner greeting and, in some cases, bear-hugging Hollywood studio executives. He owes them a lot, and it remains to be seen how they will be paid back. So the canny Bavarian is keeping relations warm as he looks for fresh funds. At least the changes about to be wrought will shine new light onto the clique-ridden and complex German media scene.