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Behind the Kirch Collapse

Sandrine Pechels de Saint Sardos explains the ins and outs of the KirchMedia collapse that has impacted not only Germany's media market but the rest of Europe and beyond.

The recent downturn in the German economy, specifically the stock market, has contributed to the KirchMedia bankruptcy and other shake-ups in the media. Photo courtesy of KirchMedia GmbH & Co KgaA.

Germany, which is one of the driving markets in the European Union, is currently fighting economic turmoil and high unemployment (9.7%). Most recently, Germanys issues were aggravated by long term problems resulting from the absorption of former East Germany into its economy and an overall stock market drop, characterized by the strong 2001 downturn of its heavily high-tech exchange, the Neuer Market.

In the entertainment industry, Germany has a highly competitive TV market where two strong public-TV networks, ARD and ZDF, battle groups of commercial networks owned by Bertelsmann and KirchMedia. But this past year, these economic woes, the bankruptcy of KirchMedia, management changes at Bertelsmann and troubles in the cable industry have further unsettled the market.

Bertelsmann went through management changes, but still is a mainstay in the German TV market. Photo courtesy of Bertelsmann Media Worldwide.

TV Platform Turmoil

The KirchMedia case is particularly interesting as over this past year European markets experienced the blackest clouds on the cable and satellite horizon, mostly because of the consolidation and insolvency of some of its pay TV platforms. A combination of tough competition, poorly thought out technology, paying too much for sports rights and just plain bad management have attacked and dried out the pay TV platform business, creating the bankruptcy of KirchMediaand the story repeats itself in France with Vivendi Universal, in Spain with Via Digital and Canal Satellite waiting to merge, and in Italy with Tele+.

In fact 2002 was the year of TV platform turmoil, which has produced a tidal wave and impacted the market so negatively that operators are shrinking costs, selling assets, merging and pushing themselves to find solutionsbut the clock is ticking and there will be few survivors.

It all started when the KirchMedia pay TV operation, Premiere World, lost about $4 billion in four years of business despite reaching 2.4 million subscribers. Through a series of complex deals, Premiere World had bought its sports and movie rights through another unit of KirchMedia, which exaggerated the pay TV operators costs. One of the sports that pulled the trigger was Formula One, which is extremely popular in Germany. However, Premiere World has had limited acceptance as the German market has a low appetite for pay TV because of the high number of free channels.

Leo Kirch built up KirchMedia's assets by buying German TV rights to U.S. movies from the '60s and '70s. Photo courtesy of KirchMedia GmbH & Co KgaA.

An Empire

KirchMedia is one of Europes largest media conglomerates, which owns the TV rights to not only Formula One, but also the 2002 and 2006 World Cup football (soccer) and controls the German language rights for a huge library of Hollywood films. Its debt burden, however, is estimated by some to amount to as much as US$13 billion. The company is now beleaguered on all fronts and the empire built by owner Leo Kirch has fallen apart.

KirchMedia's rapid expansion during the 1990s and acquisition of bigtime sports rights have brought the company depth but relatively poor revenues. Leo Kirch made his fortune by buying up the German language TV rights of many Hollywood movies during the 1960s and 1970s. After deregulation of the broadcaster sector, he expanded into TV, setting up his own free to air television station and the Premiere pay TV channel. To attract customers he bought expensive sports rights just at the height of the Internet and media boom. His critics say that he was over paying and playing well over the odds. German TV viewers are accustomed to receiving between 10 to 30 free TV channels through cable, so they have been slow to sign up for pay TV channels.

Although Formula One racing is popular in Germany, the viewers have been slow to subscribe to Premiere, KirchMedia's pay channel, which owned the exclusive TV rights to the event.

In February 2002, Prosieben Sat 1 decided to postpone a planned merger deal to give KirchMedia time to establish a more solid financial profile. The merger was designed to give KirchMedia access to fresh capital because Prosieben Sat 1 is already listed on the Frankfurt stock exchange. Privately held KirchMedia already holds a 52.5% state in Prosieben Sat 1 but only half the voting rights. When the news of the delay broke, the TV groups share price surged 20%. Half the voting rights in the broadcaster are held by the Axel Springer publishing group, which recently shocked KirchMedia by invoking a so-called put option which forces KirchMedia to buy back into Prosieben Sat 1 for $775m. This triggered a cash crisis at KirchMedia. KirchMedia owns 40% of Axel Springer but cannot sell this stake as it is the security for a loan from Deutshe bank.

Trouble Upon Trouble

Meanwhile, Rupert Murdochs News Corporation added to KirchMedias woes by writing off its stake in Premiere. Mr. Murdoch has ruled out any further investment in KirchMedia and invoked yet another put option, which will force KirchMedia to buy back Mr. Murdochs stake in Premiere -- at the set price of $1.72 billion, well above the channels market value. Plus, adding insult to injury, several banks that provide loans to KirchMedia have already gone on record saying they will not continue to support the firm any longer.

In October 2002, KirchMedia was on the verge of securing its long-term future after an all-German consortium entered exclusive talks to buy the bankrupt group. In March though after KirchMedia, its parent company, collapsed under a $6.28 billion burden, the jewel in the crown of the now defunct empire was put up for sale. German publisher Bauer Verlag and Hypo Vereinsbank (HVB), the countrys second largest commercial bank, were expected to tie up a $1.96 billion deal by mid-December. Plus, Sony's Columbia Tristar was expected to join the consortium.

Bauer publishes big-selling titles such as a TV programming guide and a German version of Hello! magazine. The family owned group also controls 20% of RTL2, one of the top four stations in the highly aggressive German TV market.

KirchMedia's financial headaches were made worse when Rupert Murdoch's News Corp. pulled out of helping the Premiere pay TV channel, and then wanted to be bought out of its share for more than the channel is worth.

The RTL Group, owner of Channel 5 and a 36% shareholder in RTL2, has not objected to the KirchMedia deal, but it's concerned that a take over of Prosieben Sat1 could clash with RTL2s interests.

Moreover, Bauer and HVB will have to mount a full takeover of Prosieben Sat 1 if their bid for KirchMedia is successful, as German law requires bidders acquiring more than 30% of a company to make an offer for 100% of the shares. This would add around $475 million to the cost of the bid.

Other bidders for the company included a link-up between French broadcaster TF1 and Haim Saban, and a group of KirchMedia shareholders, including the Lehman Brothers investment bank and Saudi investor Prince Ali-Waleed.

A Symptom

KirchMedias creditors, comprising U.S. film studios and German banks, have already sold KirchSport Group, owner of the rights to the 2006 World Cup. But Premiere was not included in this KirchMedia rescue deal.

However, all of this changed the week of March 17th, just before MIPTV, as Mr. Saban is on the verge of taking control of the coveted assets lost by Mr. Kirch, making him the first non-German to break into Germanys media market in a big way with a deal that is worth more than $2 billion. TF1 is also in partnership in the bidding with Mr. Saban. In an interview with Der Spiegel, Mr. Saban explained why he was so hungry: Its as if a big U.S. network like ABC or NBC were up for sale, such chances are rare.

Among KirchMedia's holdings were the World Cups in 2002 and 2006.

German channels are all suffering from this pay TV platform turmoil. As rival platforms have battled it out to attract subscribers, some channels have been able to squeeze better terms, but if a platform fails, this leaves the channels with fewer options and less leverage in future carriage fee negotiations. In this environment, those channels with long-term contracts in place should have sufficient breathing space to find alternative revenue streams against what will almost certainly be tougher negotiations and lower fees for their channels the next time they have to deal with a platform.

The collapse of the KirchMedia empire has had tremendous consequences on every sector of the German media, including the co-production business. The German market was saturated with library product, which eventually lowered overall pricing. There was a huge surplus of content but the demand was not there.

Whats happened in Germany with KirchMedia, or in France with Vivendi Universal, clearly changed the whole media market. TV stations are anxious and more conservative partly as a result of falling advertising and subscription revenues. It is also not just the story of an individual business failure but a symptom of an unstable international media market.

Sandrine Pechels de Saint Sardos is currently freelancing in distribution and programming, working for clients such as Hallmark/Crown Media and Classic Media. She previously worked for Sunbow Entertainment where she handled distribution and business development in North America, Europe and Asia. Born in Paris, France and living in New York for the past 7 years, she is also pursuing co-financing and co-production. She has been a panelist for KIPA in Korea and a juror for the International Emmys.