Issue 3, 01 March 2002

Financial insurance policies granted in exchange for funds needed in the past for various projects...are now coming due and Kirch, with an estimated Euro13bn in debt and other liabilities, doesn't have the cash

You know that when the bankers start knocking on the door, the bailiffs are licking their lips in anticipation. The pin-striped types are certainly pummelling at the door of Kirch Group, demanding, somewhat belatedly methinks, to know if the value of the family silver will cover what looks to be the impending collapse of Germany's largest TV broadcasting group.

Even as Leo Kirch counts his pennies and calls in favours to avert the worst, the dismemberment of the company he has created and controlled for a generation is imminent. An astute businessman who had Hollywood studios over a proverbial financial barrel in his day, Kirch's famous gruff style and cosy business practices may not be enough to get him out of this one.

The financial holes in Kirch's family of companies have an abyss-like feel, not least because of a lack of audited financial statements for the group as a whole. In the post-Enron period, sensitivities about lack of transparency are ringing alarm bells even in Germany's clubby business world.

And time is not on Kirch's side. Financial insurance policies granted in exchange for funds needed in the past for various projects, including the costly and so far profitless pay-TV venture Premiere World, are now coming due and Kirch, with an estimated Euro13bn in debt and other liabilities, doesn't have the cash.

The Sword of Damocles is held by two media companies in particular. Publisher Axel Springer has the right to sell its 11.5% stake in Prosieben Sat 1 back to Kirch Group for Euro7.6m under a put option due in April. And in February BSkyB wrote off Euro985m, or the entire book value of its stake, in Kirch's pay-TV arm ahead of a put option that it intends to exercise in October. The Sky put is worth Euro1.7bn, but again this is money that Leo Kirch does not appear to have.

Lenders are also getting restless. Kirch has over the years developed strong ties with the local political and financial elite. It may be that a personal friend of former German Chancellor Helmut Kohl and someone close to Bavarian premier Edmund Stoiber will be able to figure a way to keep money coming from leading regional state-owned bank Bayerische Landesbank. However, the cosy relations that have typified Kirch's business practices up to now may have had their time. One of Kirch's plans is to merge Kirch Media with public-traded Prosieben Sat 1. The merger is opposed by Prosieben Sat 1 shareholders who are worried that their company will be unduly exposed to the liabilities of the Kirch Group. They are calling for full financial accounting before they will give a green light, so the merger (originally scheduled for June) will likely be delayed or may never happen at all.

But the big black hole in the Kirch empire is its pay-TV operation. Some analysts believe that Premiere could run out of money as early as June.

Premier buys most of its TV rights, including rights to Hollywood movies, from Kirch Media. So if it goes down then this directly impacts the bottom line of Kirch Media, giving that company a black eye and making it even less attractive as a merger partner to Prosieben shareholders. With the merger in jeopardy, denying Kirch Group direct access to the public equity markets, and Kirch's lenders getting jittery in any case, the latter's options are looking a little thin on the ground.

Kirch Group already owns 51% of Prosieben Sat 1, which it could sell.

It also could sell Premiere, although given the state of that company it would take a fire sale price to conjure up a buyer. Kirch also owns the controlling stake in company that owns Formula 1 racing which could bring in from $700m to $1.5bn if sold.

Interestingly, the influence wielded by Kirch over various media companies, from Prosieben Sat 1 to Axel Springer, and the leverage he had over Rupert Murdoch, have now evaporated. BSkyB has distanced itself from Premiere to insulate its stock price from any financial fallout, but Murdoch and Axel Springer (which is run by a former News Corp senior executive Gus Fischer) could use this opportunity to get their hands on a part of the TV business in Germany, something that both would relish.

However, Murdoch in particular could still face a rough ride in Germany from politicians concerned about the Australian media mogul moving into their country the way he has in the UK. This could open the door for John Malone. Along with Murdoch and Springer, Malone is surely at least one step ahead of those bailiffs.