For Broadcast, March 10, 2002

Facing inquisitive reporters in London recently, the CEO of Germany’s beleaguered Kirch Gruppe Dieter Hahn was probably wishing he had a fast getaway car as he was barraged with questions about the heavily indebted media company.

Sadly the 75% stake in the company that controls Formula 1 racing is among those Kirch Gruppe assets that have ‘For Sale’ signs hung on them. It’s all part of a necessary restructuring as Germany’s largest broadcaster staggers under an estimated Euro 13 billion of debt and other obligations including an option held by BSkyB worth Euros1.7 billion and due in October. Sky has made it clear that it wants the cash rather than continue holding a stake in Kirch’s struggling German pay TV company Premiere.

But even as BSkyB’s Tony Ball tried to insulate Sky’s share price from Kirch’s troubles by saying that Sky would put "not a penny more" into Premiere (estimated by WestLB Panmure bank to be losing Euros1.5 million a day) there are big doubts if Kirch will have the cash to pay back the obligation.

In London, Hahn admitted Premiere has been going through a "very difficult phase," but added, "I don't know many pay-TV platforms that do work at the moment." This wildly underplays the very real mistakes that Kirch has made in pay TV. A high cost base and technical problems added to a marketing proposal that offers little differentiation in a market which already has over two dozen free to air TV channels, has hobbled Premiere.

The pay TV business is certainly a black hole in the empire that Leo Kirch has built over the last fifty years, but it is not the only concern for lenders facing a financial meltdown exacerbated by an advertising downturn hurting Kirch’s majority controlled broadcast TV business ProSeibenSat.1. At the same time, a restructuring of Kirch Gruppe’s liabilities are being hampered by a lack of financial transparency across the group. With an army of lenders that include Germany’s leading banks, any wholesale break up of the holding company that spans publishing, broadcasting and a TV rights business would not benefit all lenders equally.

Kirch’s plans to merge its KirchMedia unit into the publicly-traded ProSiebenSat.1 is running into opposition from the ProSiebenSat.1 shareholders worried that their company will be unduly exposed to the liabilities of the Kirch Gruppe. Added to this, Premiere buys most of its TV rights, including rights to Hollywood movies, from KirchMedia. So if Premiere goes out of business this directly impacts the bottom line of KirchMedia. There are also rumors that several Hollywood studios may be interested in taking equity in ProSiebenSat.1. It seems the studios would rather take a stake in the indebted German broadcast group than be left waiting for the broadcast fees they should receive for their films.

So with the merger with ProSiebenSat.1 in jeopardy and Kirch’s lenders jittery over the true financial health of Leo’s empire, the options for Germany’s leading media mogul look pretty thin. The control Leo once exercised through his varied interests, including publisher Axel Springer Verlag and ProSiebenSat.1 as well as the leverage he held over Rupert Murdoch through his minority stake in Premiere, have also now all but evaporated.